Construction and real estate employers are among the businesses most likely to feel the impact of the federal income tax deduction for qualified overtime compensation created by the One Big Beautiful Bill Act (OBBBA). While the deduction is claimed by eligible employees on their individual tax returns, employers are responsible for identifying and reporting the qualifying overtime amounts, a task that can be far more complex than it first appears.
Project deadlines, weather disruptions, emergency repairs, apartment turnovers, snow and ice response, on-call maintenance, prevailing wage work, multiple pay rates, and collective bargaining agreements can all complicate overtime calculations. As a result, construction companies, developers, property managers, and real estate operators must ensure that their payroll and timekeeping systems can accurately identify the portion of overtime pay that qualifies for the deduction.
Importantly, qualified overtime compensation is not the same as total overtime pay. The deduction generally applies only to overtime compensation required under the Fair Labor Standards Act (FLSA) for nonexempt employees. Overtime paid to exempt employees or amounts paid solely because of state law requirements, company policy, collective bargaining agreements, or other arrangements generally does not qualify. Only the FLSA-required overtime premium (i.e., the additional amount paid above an employee’s regular rate) is eligible for the deduction. For a typical time-and-a-half payment, that means only the extra “half” portion qualifies, not the entire overtime wage.
Although the deduction provides a potential tax benefit for employees, it does not change the payroll tax treatment of overtime compensation, which generally remains subject to federal income tax withholding and both employer and employee Social Security and Medicare taxes. Beginning with mandatory reporting requirements, employers will need to separately identify and report qualifying overtime compensation on Form W-2, making accurate calculation and documentation more important than ever.
In this article, we explore the overtime deduction rules and highlight the unique compliance and reporting considerations facing construction and real estate employers.
Why The Calculation is Often Difficult
Construction and real estate employers should not assume qualified overtime can be estimated with a simple formula. Employees may work at different rates during the same workweek because of job classifications, foreman pay, shift differentials, prevailing wage projects, weekend work, or emergency service calls. Under FLSA regular-rate rules, the overtime premium may need to be determined using a weighted-average regular rate rather than a single hourly rate. Learn more in our article, “2026 W‑2 Readiness Under OBBBA: Identifying the FLSA Overtime Premium.”
Employers also need to distinguish FLSA-required overtime from other premium pay. Double time, holiday premiums, daily overtime, weekend premiums, or amounts paid solely under state law, policy, or a collective bargaining agreement may affect the regular-rate calculation in some cases, but amounts paid beyond the FLSA-required premium are not qualified overtime compensation for the purposes of the deduction. Overtime must be evaluated on a workweek-by-workweek basis; employers should not average hours across pay periods.
2025 is the Transition Year; 2026 is the Compliance Year
The IRS has provided transition relief for 2025. For taxable year 2025, the IRS will not impose penalties under Sections 6721 or 6722 solely because an employer or payor fails to separately report qualified overtime compensation on the applicable information return or payee statement, provided the form is otherwise complete and accurate.
That relief is temporary. Beginning with 2026 reporting, Forms W-2 must separately show qualified overtime compensation paid during the year. The 2026 Form W-2 instructions state that new Box 12, Code TT, is used to report the total amount of qualified overtime compensation. Employers that fail to file correct Forms W-2 or fail to furnish correct employee statements may be subject to information reporting penalties.
Starting with mandatory 2026 reporting, employers should treat Code TT reporting as a compliance requirement, not an optional employee benefit disclosure. Section 6721 penalties can apply to failures to file correct information returns, including failures to include required information or inclusion of incorrect information; Section 6722 imposes parallel penalties for failures to furnish correct payee statements.
For Forms W-2 required to be filed after December 31, 2026, the IRS instructions list inflation-adjusted penalties of $60 per Form W-2 if corrected within 30 days, $130 per Form W-2 if corrected more than 30 days after the due date but by August 1, and $340 per Form W-2 if filed after August 1, not corrected, or not filed, subject to annual maximums. Employers remain responsible for correct and timely Forms W-2 even if they use a third-party payroll provider.
More serious failures can be substantially more expensive. Intentional disregard penalties are not subject to the normal reduced penalty or annual maximum rules and can be based on the greater of a stated per-return amount or a percentage of the amounts required to be reported correctly. Penalties may be waived where the failure is due to reasonable cause and not willful neglect.
Action Steps
Construction and real estate employers should use the transition period to make sure payroll, timekeeping, and HR systems can identify the correct Code TT amount. Practical steps include:
- Confirm FLSA exemption classifications, especially for construction, maintenance, leasing, administrative, and property operations personnel.
- Map earning codes to distinguish FLSA-required overtime premiums from non-qualifying premiums paid under state law, policy, contract, or collective bargaining agreement.
- Identify multiple-rate workweeks and validate regular-rate calculations.
- Test whether payroll systems can isolate only the FLSA-required premium portion, not total overtime pay.
- Reconcile qualified overtime calculations to workweek-level time and pay records.
- Coordinate with payroll providers and document the methodology for Code TT reporting.
- Communicate to employees that the deduction is claimed on the employee’s income tax return and does not change payroll withholding or increase current take-home pay.
- Revisit worker-classification practices to ensure employees are not improperly treated as independent contractors, which can create both wage-and-hour and reporting risks.
Final Thoughts
For construction and real estate employers, the new overtime deduction is a tax law change that creates a payroll reporting obligation. Employers with nonexempt workforces, complex pay practices, or decentralized timekeeping should use the 2025 transition period to prepare before 2026 reporting becomes mandatory. If you have questions about how these rules apply to your workforce or payroll systems, we are here to help.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
