Employees who receive overtime compensation for hours worked over 40 in a workweek may qualify for a federal income tax deduction under the One Big Beautiful Bill Act.
The deduction applies to the premium portion of qualified overtime compensation. For example, this generally means the “half” portion of time-and-a-half overtime pay that is required under the Fair Labor Standards Act (FLSA).
Federal Overtime Hours differ from Paid Overtime Hours in that they are specifically used for reporting purposes under the Fair Labor Standards Act (FLSA). While Paid Overtime Hours represent the actual hours compensated at time-and-a-half, Federal Overtime Hours are a reporting category that typically mirrors the hours entered for FLSA overtime. This distinction is crucial for accurate W-2 reporting.
This deduction applies to tax years 2025 through 2028.
Beginning in 2026, you will need to enter FLSA overtime hours in Patriot Payroll so Patriot can report the required overtime deduction information on employee W-2s.
For more information, see our blog article, No Tax on Overtime.
How to Mark Overtime as FLSA Overtime
Before you run payroll
If an employee has FLSA overtime hours, use Patriot’s built-in Overtime Hours box when running payroll, or use a custom overtime hour type that is set to Use as FLSA OT (Qualified OT).
If you pay overtime with a custom hour type (for example, a “Weekend Overtime” hour type with a 1.5x Rate Multiplier), set that custom hour type to Use as FLSA OT. All hours paid with a custom hour type set to Use as FLSA OT are reported as FLSA overtime for W-2 reporting. Custom overtime hour types set to Not used as FLSA OT are not reported as FLSA overtime. For instructions, see the section “How to Set a Custom Overtime Hour Type as FLSA Overtime (Qualified OT)” in this article.
Go to Payroll > Run a New Payroll.
Select the pay schedule you want to use.
Enter the employee’s hours.
Enter the nonexempt employee’s total hours worked for the pay period.
If the employee worked overtime or double time, enter the number of hours in the built-in Overtime or Double Time boxes, or in a custom overtime hour type set to Use as FLSA OT.
Click Next.
If your company has eligible custom overtime hour types that have not been answered yet, Patriot shows the prompt “Indicate whether the following hour type is used for Fair Labor Standards Act (FLSA) overtime wages.” Select Use as FLSA OT or Not used as FLSA OT for each listed hour type. See “Option 2: Answer the FLSA Overtime Prompt in Payroll” in this article.
If you entered hours in the Overtime or Double Time boxes, Patriot will automatically open the FLSA Overtime Designation page in Step 1A.
Enter the employee’s FLSA overtime hours.
For each nonexempt employee, enter the total number of FLSA overtime hours. These hours are used for reporting only. They do not calculate or change the employee’s pay.
Patriot will calculate the premium pay amount, meaning the “half” portion of time-and-a-half overtime pay, and report the amount on the employee’s W-2. You only need to enter the FLSA overtime hours over 40 in one week. Do not include overtime hours paid as a result of other state or company rules.
Click Continue to review payroll calculations.
Complete Step 2 and Step 3 to approve and finish payroll.
If you use Time & Attendance
If you use Patriot Time & Attendance and sent time cards to payroll, the Federal Overtime Hours will be prefilled based on the employee’s time worked for the pay period.
If you did not send time cards to payroll, you can:
Click Auto-Fill All to copy all paid overtime hours into Federal Overtime Hours
Override the copied hours, if needed
Manually enter the federal overtime hours
If an employee is exempt from FLSA overtime
If an employee is exempt from FLSA overtime, enter 0 hours on the FLSA Overtime Designation page.
How to Set a Custom Overtime Hour Type as FLSA Overtime (Qualified OT)
A custom hour type is an hour type you create in Patriot in addition to the built-in Regular, Overtime, and Double Time hours. If your company pays overtime with a custom hour type, you can designate that custom hour type as FLSA overtime, also called Qualified OT. When a custom overtime hour type is set to Use as FLSA OT, all hours paid with that custom hour type are reported as FLSA overtime for One Big Beautiful Bill Act W-2 reporting (Box 12, code TT).
You can set a custom hour type as FLSA overtime in two places: in your Hours & Money Types settings, or when Patriot prompts you while running payroll. Answering in either place updates the other place instantly.
Which custom hour types can be set as FLSA overtime
Only custom hour types with a Rate Multiplier of 1.5 or higher are eligible for the Qualified OT designation.
For custom hour types with a Rate Multiplier below 1.5, the Qualified OT checkbox is disabled in Settings and in payroll.
Option 1: Check the Qualified OT Box in Settings
Go to Settings > Payroll Settings > Hours & Money Types.
Click the name of the custom hour type you use for overtime. The Edit Hour Type page opens.
Check the Include as Qualified OT to add FLSA OT hours box. The box appears below the Rate Multiplier field.
Click Save.
Option 2: Answer the FLSA Overtime Prompt in Payroll
When you run payroll and click Next after Step 1 (Enter Payroll), Patriot shows the prompt “Indicate whether the following hour type is used for Fair Labor Standards Act (FLSA) overtime wages” if your company has eligible custom overtime hour types that have not been answered yet.
For each custom hour type listed, select Use as FLSA OT or Not used as FLSA OT.
To answer for every listed hour type at once, click Use as FLSA OT or Not used as FLSA OT next to Set all.
The FLSA overtime prompt lists every eligible custom overtime hour type in your company that has not been answered yet, not only the custom hour types used in the current payroll.
After you answer Use as FLSA OT or Not used as FLSA OT for a custom hour type, the FLSA overtime prompt stops appearing for that custom hour type in future payrolls.
What happens after you set a custom hour type as FLSA overtime
The Rate Multiplier for a custom hour type marked Qualified OT is locked and cannot be changed afterward. Patriot locks the Rate Multiplier to protect wages that were already reported.
To remove the Qualified OT designation, go to Settings > Payroll Settings > Hours & Money Types, click the custom hour type, uncheck the Include as Qualified OT to add FLSA OT hours box, and confirm the warning message.
How to choose Use as FLSA OT or Not used as FLSA OT
Choose Use as FLSA OT when the custom hour type pays overtime for hours over 40 in a workweek, as required by the FLSA.
Choose Not used as FLSA OT when the custom hour type pays overtime only because of state rules (such as daily overtime in Alaska, California, Colorado, or Nevada) or company policy.
Questions about what counts as FLSA overtime
Patriot does not determine whether hours qualify as FLSA overtime. If you have questions about whether specific hours or custom hour types qualify, review Department of Labor guidance or contact your payroll or legal advisor.