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On August 6, 2026, the IRS released Fact Sheet FS-2026-13, substantially revising and replacing FS-2026-01, its January 2026 guidance on the new deduction for qualified overtime compensation enacted by the One Big Beautiful Bill Act (OBBBA). The revised guidance reflects the transition from the temporary 2025 reporting relief period to a more formal compliance regime applicable for tax years 2026 through 2028.  As a reminder, the IRS provided transition penalty relief for tax year 2025 to excuse the requirement that employers and other payers report qualified overtime compensation separately on Forms W-2, 1099-NEC, and 1099-MISC. See Notice 2025-62.

While the updated fact sheet includes numerous technical revisions, several changes are particularly significant for employers, payroll providers, and employees seeking to claim the deduction. Most notably, the IRS emphasizes that beginning in 2026 employees generally may claim the deduction only based on amounts separately reported by employers, increasing the importance of accurate overtime calculations and information reporting.

Key Changes in FS-2026-13

The August update to the FAQs:

  • Removes guidance applicable solely to the 2025 transition year.
  • Clarifies deduction limitations and timing rules, including that the same principles governing when a payment is treated as wages for income tax withholding purposes apply to determine when qualified overtime compensation is paid.
  • Expands guidance regarding Fair Labor Standards Act (FLSA) coverage and exemptions.
  • Provides detailed Form W-2, Form 1099-NEC, and Form 1099-MISC reporting rules.
  • Adds federal income tax withholding guidance.
  • Clarifies the requirement that qualified overtime compensation be separately reported to support the deduction.

Notable Guidance: The W-2 Generally Controls the Deduction

One of the most consequential revisions concerns information reporting. FS-2026-13 confirms that, beginning in 2026, employers must separately report qualified overtime compensation on Form W-2, Box 12, Code TT. In the rare circumstance where a worker is an employee for FLSA purposes but is treated as an independent contractor for purposes of the Internal Revenue Code, the payor must report qualified overtime compensation on Form 1099-MISC (Box 14) or Form 1099-NEC (Box 1d) instead of Form W-2.

For tax years beginning in 2026, the IRS has made clear that separate reporting will become the cornerstone of the deduction framework. The practical implication is that employees may be unable to claim deductions in excess of amounts reported by their employers, even where they believe additional overtime compensation qualifies based on their records. However, an employee cannot just rely on the amount reported on Form W-2, Box 12, Code TT to the extent the employer overstates the qualified overtime paid to the employee.

Specifically, FAQs 20, 21, and 22 make clear that, in determining the deductible amount of qualified overtime compensation, the employee is only entitled to consider overtime compensation that is:

(1) actually paid as qualified overtime compensation during the taxable year, and

(2) reported on the Form W-2, Box 12, Code TT.

If the employer overstates the amount reported, the employee is still limited in his or her deduction to the amount actually paid.  If the employer understates the amount reported, the employee is stuck with the amount listed in Box 12, Code TT unless and until they receive a Form W-2c, Corrected Wage and Tax Statement, showing a higher amount. The rationale for this is based on IRC section 225(a), which requires that qualified overtime be separately reported on the employee’s Form W-2 for qualified overtime compensation to be deductible by the employee. As such, any amount not reported on the Form W-2 is not eligible for the deduction, and the employee is not able to use Form 4852 (substitute for Form W-2) to increase the deduction where the employer will not provide a Form W-2c.

This places increased pressure on employers to properly identify, calculate, and report qualified overtime compensation. It also places a burden on employees to ensure their records match what the employer reports on Form W-2 so that they claim a deduction only for what is actually paid, but only to the extent of what is reported in Box 12, Code TT.

New Correction Requirements Increase Employer Exposure

FS-2026-13 adds a new FAQ addressing correction obligations. If an employer discovers an error in the amount reported in Box 12, Code TT, according to FAQ 11, the employer must issue a Form W-2c and provide the corrected form to the affected employee as soon as possible. Failure to do so may trigger information return penalties under IRC sections 6721 and 6722, though reduced penalties may apply for timely corrections.

This guidance, in combination with the guidance that employees are limited to what’s correctly reported on Form W-2, may create new employee relations and litigation risks. Employees whose deductions are limited by inaccurate reporting may pressure employers to issue corrected Forms W-2. Employers that decline such requests or fail to investigate potential reporting errors could face disputes over lost tax benefits.

IRS Provides a Detailed Formula for Calculating Qualified Overtime Compensation

The revised FAQs offer considerably more guidance on calculation methodology than the January version.

The IRS confirms that qualified overtime compensation generally equals:

(Hours worked in excess of 40 during an FLSA workweek) × (½) × (the employee’s FLSA regular rate of pay).

The guidance stresses that only the overtime premium portion qualifies for the deduction. Thus, while an employee generally will receive time-and-one-half pay for overtime hours worked, only the additional one-half premium constitutes qualified overtime compensation.

The IRS guidance also confirms alignment between the deduction and existing FLSA rules for:

  • FLSA workweek determinations.
  • Hours worked calculations.
  • Computation of the FLSA regular rate of pay.
  • Alternative overtime calculation methods under the FLSA.

For many employers, these rules may require payroll systems to track data differently than they currently do for state law overtime, collective bargaining agreements, or employer-specific premium pay arrangements.

Expanded Guidance on FLSA Exemptions

Another notable change is the IRS’s expanded discussion of who is and is not eligible for the deduction.

The fact sheet emphasizes that only overtime required under the FLSA can qualify. Employees exempt from the FLSA’s overtime requirements are ineligible for the deduction, regardless of whether they are eligible for or receive overtime-like payments under employer policy, state law, or collective bargaining agreements.

The IRS specifically highlights several common exempt categories, including:

  • Executive employees
  • Administrative employees
  • Professional employees
  • Outside sales personnel
  • Certain computer employees
  • Certain commissioned retail employees

The guidance also adds a new FAQ confirming that employee-owners holding at least a 20% bona fide ownership interest and actively engaged in management generally are treated as exempt executives and therefore are not eligible for the deduction. See FAQ 5.

Non-FLSA Overtime Generally Does Not Qualify

The IRS further clarifies that employers must distinguish between overtime required under the FLSA and supplemental overtime payments provided voluntarily or under other legal requirements.

For example, premiums for:

  • Hours worked beyond eight in a day
  • Weekend work
  • Holiday work
  • Double-time arrangements

may exceed what the FLSA requires. In those situations, only the amount necessary to satisfy the federal overtime requirement constitutes qualified overtime compensation. Any excess payment does not generate an additional deduction.

This distinction could prove challenging for employers with complex premium pay structures, multiple state law overtime requirements, or collectively bargained compensation programs.

In particular, the distinction between FLSA-required overtime and state law is likely to create employee confusion and implementation challenges. Some employees will be subject to FLSA overtime exemptions that do not have parallels in state law, such as the seasonal amusement and recreational establishment exemption, specific federal exemptions for auto dealerships/sales mechanics, the highly-compensated employee exemption, and exemptions for certain agricultural and motor carrier workers. For purposes of the deduction, employers therefore will need to independently evaluate whether workers are exempt from overtime under the FLSA regardless of whether the workers qualify for state overtime, creating a new compliance challenge.

New Withholding Guidance

FS-2026-13 also addresses a question many employers have raised: whether withholding should be reduced automatically to reflect the deduction.

The IRS answer is no. Qualified overtime compensation remains fully subject to federal income tax withholding. Employers generally may not reduce withholding unless an employee submits an updated Form W-4 reflecting the anticipated deduction. The IRS also updated the 2026 Form W-4 to allow employees to account for the deduction.

Clarified Eligibility Requirements

The guidance confirms two important employee eligibility requirements. First, under FAQ 25, married employees (within the meaning of IRC section 7703) must file a joint return with their spouse to claim the deduction.

Second, under FAQ 24, the employee must have a social security number that is valid for employment and issued by the Social Security Administration (SSA) before the due date of the employee’s individual income tax return (including extensions). Employees who do not satisfy either requirement are ineligible for the deduction regardless of the amount of qualified overtime compensation reported on their Form W-2.

As a reminder, the deduction is capped at $12,500 per individual return ($25,000 for joint filers) and is reduced for taxpayers whose modified adjusted gross income (MAGI) exceeds $150,000 ($300,000 for joint filers).

What Employers Should Do Now

The revised FAQs signal that the IRS expects robust compliance beginning in 2026. Employers should:

  1. Review payroll systems to ensure qualified overtime compensation can be separately identified and reported.
  2. Evaluate whether existing overtime calculations properly track FLSA-required overtime versus non-FLSA premium pay.
  3. Develop procedures for reviewing employee requests for corrections and issuing Forms W-2c where appropriate.
  4. Train payroll, HR, and employee relations personnel on the new reporting requirements.
  5. Review worker classifications and FLSA exemption determinations, as eligibility for the deduction depends on FLSA status.

While beyond the scope of this article, state and local government employers should pay particular attention to the compensatory time rules, and federal agencies should review OPM’s FLSA regulations to ensure their payroll systems properly identify and report the qualified overtime compensation component.

Employers can point their employees to the updated FAQs or Notice 2025-69 if they have questions on claiming the qualified overtime compensation deduction.

Takeaways

The IRS’s focus on separate reporting, correction obligations, and detailed FLSA analysis means that payroll reporting accuracy will directly affect employees’ ability to claim the deduction. Employers that have not yet implemented processes for calculating and reporting qualified overtime compensation should do so promptly, as reporting errors may now carry both tax reporting penalties and employee relations consequences.

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The Department of Labor (DOL) issued Technical Release 2026‑02 on June 17, 2026, providing critical clarity for employers evaluating whether to offer contributions to “Trump Accounts” under IRC sections 530A and 128; contributions to Trump accounts could be made as of July 4, 2026. The guidance addresses a key open question flagged in our earlier post regarding whether these arrangements would trigger Employee Retirement Income Security Act (ERISA) plan status, which would implicate technical rules regarding fiduciary duties, claims and appeal procedures, and plan reporting and disclosures, among others.

The DOL concluded that Trump Accounts and related employer Trump Account Contribution Programs (TACPs) will generally not constitute “employee pension benefit plans” under ERISA Title I, even if funded in whole or in part by employer contributions pursuant to IRC section 128. The guidance provides favorable clarity and removes a potential stumbling block for employers considering establishing a TACP.

DOL Technical Release 2026-02

Prior to Technical Release 2026‑02, ERISA classification was a key unresolved risk for employers, particularly given that TACPs require a written employer program and could resemble benefit plans.

DOL’s conclusion that TACPs will generally not be subject to ERISA removes a major barrier for employers. The rationale underlying the guidance includes that Trump Accounts are individually owned Individual Retirement Accounts (IRAs), not employer‑established retirement plans; that in most cases, benefits accrue to a child (dependent), not the employee, which weighs against ERISA plan characterization; and that the accounts can be funded by multiple sources (family, government, employers), reinforcing their non‑employer‑centric design.

Continue Reading DOL Clarifies ERISA Treatment of Trump Accounts: What Employers Need to Know
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Compared to many other countries, Germany has rather strict labor and employment laws. The current government has just announced plans to make employment law more flexible through comprehensive changes. Among other things, these plans include:

  • Allowing fixed-term employment contracts more frequently and for longer periods
  • Enabling employers to terminate the employment of “high earners” in exchange for a severance payment, even without a specific reason
  • Tightening the requirements for employees to take sick leave
  • Making it easier to implement and update software in companies with a works council.

Against this background, employers should already assess how they can best benefit from the new regulations, for example with regard to employment contracts and proceedings in case of terminations. However, it should be noted that the plans still need to be approved by parliament and implemented into law. Changes to the plans are therefore possible.

Key takeaways

  • For employees hired until December 31, 2030, it is planned that fixed-term employment contracts without objective grounds will be permitted for a maximum duration of up to four years and may be extended up to six times. This would provide additional flexibility for employers and is particularly helpful for companies that rely on such flexibility, such as start-ups.
  • For high earners, it is planned to introduce a regulation effective January 1, 2027 that allows termination of the employment relationship in exchange for a severance payment. Even if a court does not consider the termination to be socially justified, this instrument would still allow the employment relationship to be terminated. This creates a promising tool in termination proceedings involving employees with high income.
  • Other planned changes, such as stricter rules for employees taking sick leave, tax advantages for severance payments also appear attractive for businesses in Germany.
  • Even though the resolutions of the coalition committee must still be approved by parliament, the plans are already quite tangible. The likelihood of approval is increased given that the proposals are the result of negotiations between the coalition parties.

In more detail

More flexibility for fixed-term contracts:

  • For employees hired until December 31, 2030, it is planned that fixed-term employment contracts without objective grounds will be permitted for a maximum duration of up to four years – rather than the previous two years – and may be extended up to six times, instead of the previous limit of three extensions. In this context, it will also be possible to rehire an employee by the same employer for the first time.
Continue Reading Planned Significant Changes to German Employment Law
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Baker McKenzie’s legal resource for companies taking business models, products and technology international.

Are you considering expanding into new jurisdictions? Are you aware which foreign laws and legal issues matter most? Have you prepared a detailed statement of facts, plans and questions for counsel?

The latest edition of our Field Guide to Going Global helps you examine foreign law issues for taking business models, products and technology international. Our guidance should be helpful whether you are working for a start-up company or a large multinational enterprise that is broaching new frontiers.

The Guide covers export control and sanctions considerations, intellectual property rules, data privacy and cybersecurity frameworks, franchise and competition law, employment and global equity regulations, tax compliance and planning issues, corporate development matters and more.

Click here to access the guide.

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The EU Pay Transparency Directive’s transposition deadline—June 7, 2026—has passed. As of the June 7 deadline, only a handful of Member States—notably Slovakia, Italy and Lithuania—have fully or largely implemented the Directive, with most others still working through draft legislation or delayed timelines.

Most member states are behind, resulting in uneven implementation across the bloc and leaving employers to navigate a fragmented and evolving landscape with staggered national rollouts and divergent approaches across jurisdictions. Here’s what US-based multinationals need to know now.

The Practical Outlook for Multinational Employers

For US companies managing EU workforces, the next 12–24 months will look like:

Patchwork Implementation

  • Countries will finalize laws on different timelines
  • Some will gold-plate requirements (e.g., broader scope, stricter remedies)
  • Others may take a more minimalist approach

Rolling Compliance Programs

  • Employers will need to sequence implementation by jurisdiction
  • Internal frameworks must be modular and adaptable, not one-size-fits-all

Heightened Litigation & Enforcement Risk

Even before full implementation, expect:

  • Increased employee claims and works council pressure
  • Greater scrutiny of pay equity and transparency practices
  • Use of existing laws (e.g., equal pay frameworks) alongside emerging rules

Reminder of the Directive’s Core Requirements

The Directive introduces a consistent set of core obligations across the employment lifecycle, centered on greater transparency, more rigorous pay monitoring, and enhanced enforcement risk—though the detail and delivery will vary by country.

Continue Reading EU Pay Transparency Directive: Deadlines Missed, But the Real Work Starts Now
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We are pleased to share with you The Global Employer – Global Immigration & Mobility Quarterly Update, a collection of key updates from Australia, South Africa, Thailand, and the United States.

Click here to view.

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In our recent post, AI Regulation on Hold in Colorado—But Employer Risk Isn’t, we flagged that delay did not mean diminished risk. That continues to hold true. Colorado has now approved a comprehensive rewrite of its AI law, while Illinois regulators are advancing practical disclosure requirements for employers using AI in employment decisions.

The direction is clear: AI oversight in the workplace is moving forward—and becoming more operational.

Colorado: Recalibration, Not Retreat

Colorado’s rewrite reflects an effort to make its AI framework more workable—but not less relevant for employers.

Key points:

  • Employment uses remain in scope: AI tools used in hiring, promotion, and other employment decisions continue to be treated as “high risk.”
  • Governance expectations remain: Employers will still need risk management and oversight frameworks.
  • Transparency still matters: Notice and documentation obligations continue, even as details evolve.
Continue Reading Colorado and Illinois Advance AI Transparency Obligations for Employers
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Some historically more employer-friendly APAC jurisdictions are becoming harder to manage as employee protections expand and procedural requirements tighten. In 2026, the region is broadly politically stable, but economic caution, recent elections, and pro-labor legislative agendas are reshaping employment risk in different ways across key jurisdictions. China is emphasizing employment stability and risk containment; South Korea and Australia are advancing employee-friendly labor agendas; and Japan, Singapore, and Vietnam remain relatively stable politically but are seeing increasingly sophisticated employment regulation. For in-house teams, the core risk is not missing a headline reform, but underestimating how process, consultation, and documentation increasingly determine outcomes.

Below are the developments global employers should have firmly on their radar.

1. Workforce Flexibility Is Narrowing—and Execution Risk Is Rising

Across APAC, worker misclassification and restructuring execution have become standout employment risks. In many markets, the primary exposure is no longer just whether an employer has a legal basis to act, but whether it can show the relationship was properly classified and that any termination, redundancy, or outsourcing decision was implemented through a defensible process.

  • South Korea combines aggressive labor reform with real enforcement risk. Unlawful contracting arrangements and illegal dispatch (e.g., subcontracted workers) have long carried criminal liability under Korean law. The Yellow Envelope Act now allows even lawfully subcontracted workers to unionize and bargain directly with client companies. The new administration has also pledged to close even lawful outsourcing loopholes, raising the stakes for businesses that rely on layered service or contractor models.
  • Australia continues moving toward an employee-protective model. Recent reforms driven by legislation and case law have refocused classification analysis on the real substance of the relationship, while courts and regulators are increasingly attentive to consultation, redeployment, and safety in workforce change exercises.
  • China, Japan, and Vietnam each create execution risk, but in different ways. China and Vietnam apply substance-over-form tests that increase recharacterization risk for outsourcing and contractor models. Japan and China are particularly restrictive on termination, requiring clear legal grounds and close procedural compliance. Vietnam does not recognize at-will employment, so even commercially justified exits require careful implementation.
Continue Reading Asia Pacific in Focus: 2026 Employment Law Shifts Global Employers Can’t Ignore
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We are thrilled to announce that the latest edition of The Global Employer: Focus on Global Immigration & Mobility is now available! This handy, online reference guide is provided complimentary to our client HR and legal teams and includes:

  • An overview of key global immigration and mobility issues to consider related to immigration, employment, compensation and employee benefits, income taxes and social insurance, and global equity compensation.
      
  • 27 jurisdictional chapters identifying key government agencies, highlighting current compliance and enforcement trends, and describing short and long term visas appropriate for business travel, training and employment assignments. 

Click here to access now.

Baker McKenzie offers comprehensive legal advice related to global immigration – delivered locally around the world. We help employers plan and implement global transfers and provide on-site legal support to companies and employees in most major business communities around the globe. To learn more, visit our Global Immigration & Mobility page.

*Jurisdiction chapters available for Argentina, Australia, Austria, Belgium, Brazil, Canada, China, Colombia, Czech Republic, Germany, Hong Kong SAR, Hungary, Italy, Japan, Luxembourg, Mexico, The Netherlands, Philippines, Poland, Singapore, Spain, Switzerland, Taiwan, Ukraine, United Kingdom, United States, and Vietnam.

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May is Mental Health Awareness Month—a timely reminder for employers to take a fresh, thoughtful look at how workplace policies and practices support employees’ mental health. This includes ensuring compliance with evolving requirements around leave, reasonable accommodations under the ADA, and broader mental health considerations. As the legal landscape continues to shift, even well‑intentioned missteps can create significant risk.

In the latest episode of The Employer Rapport, Baker McKenzie’s employment litigators share practical guidance and actionable steps to help employers navigate these complex issues with clarity and confidence.

Learn how to reduce risk, stay compliant, and get ahead of issues—including how to:

  • Engage in a legally compliant, good‑faith interactive process under the ADA
  • Manage leave requests and accommodation obligations after statutory leave is exhausted
  • Address mental health‑related disclosures while maintaining confidentiality
  • Evaluate remote and hybrid work requests as potential accommodations
  • Enforce attendance and performance expectations without increasing exposure

Click here to view the video.

*Captions are automatically generated. We apologize for any typos or errors.