For years, overtime tracking meant knowing who worked more than 40 hours and paying them time and a half. Starting in 2026, employers also have to report each employee’s qualified overtime separately on Form W-2, in box 12 with code TT, so workers can claim the new federal overtime deduction. That figure is only part of total overtime pay. It covers the extra “half” that federal law requires, and it leaves out daily overtime under state law and premiums an employer pays by choice.
This guide covers what to record, how to separate qualified overtime from the rest, and whether a paper log, a spreadsheet, or software suits your team. The examples show where the two numbers diverge, and the rules link to the IRS or Department of Labor sources behind them.
Overtime tracking: the short answer
Overtime tracking is recording each non exempt employee’s hours, regular rate, and overtime pay closely enough to pay them correctly and report the right figures. In 2026 that means keeping three numbers for every workweek:
| Number | What it is | Why you need it |
|---|---|---|
| Hours worked | Each day and the weekly total | Federal overtime starts after 40 a week; some states also count daily hours |
| Total overtime pay | All premium pay for extra hours, under any law or policy | What goes on the paycheck |
| Qualified overtime | Only the “half” the FLSA requires for hours over 40 | Reported on Form W-2, box 12, code TT, for 2026 onward |
The first two are standard payroll figures. The third is new, and it is the one most likely to be wrong unless your time records separate federal overtime from everything else.
What is qualified overtime tracking?
Qualified overtime tracking is keeping a running total of the overtime premium that counts for the federal tax deduction, so it can be reported to employees. For tax years 2025 through 2028, workers can deduct qualified overtime compensation up to $12,500 a year, or $25,000 for joint filers, with the deduction reduced above $150,000 of modified adjusted gross income, or $300,000 for joint filers (IRS).
The reporting rules changed between the first two years:
- Tax year 2025. Employers were not required to report qualified overtime separately. Some chose to show it in box 14 of Form W-2, in an online portal, or on a separate statement. Employees without that information could estimate it using the methods in Notice 2025-69.
- Tax year 2026 and later. The IRS says “an employer must report the amount of qualified overtime compensation paid to an employee beginning in 2026, on Form W-2 in box 12, using code TT” (IRS FS-2026-13). The code also appears in the 2026 W-2 instructions.
The W-2s for 2026 are due in early 2027, so tracking has to be in place for every pay period of 2026. Mistakes also cost extra work later. An employer that finds an error in the code TT amount must file a corrected Form W-2c.
What counts as qualified overtime, and what does not
The IRS defines qualified overtime compensation as overtime “required under section 7 of the Fair Labor Standards Act” that “exceeds the regular rate at which the individual is employed.” In plain terms, it is only the premium part of federally required overtime, which is a smaller number than the overtime paycheck.
| Pay item | Qualified overtime? | Why |
|---|---|---|
| The “half” in time and a half for hours over 40 a week | Yes | Required by FLSA section 7 |
| The straight time part of those hours | No | It equals the regular rate, not the excess |
| Double time paid for hours over 40 | Only the “half” | The extra half above the FLSA minimum is voluntary |
| Daily overtime under state law in a week of 40 hours or less | No | Not required by the FLSA |
| Overtime paid to exempt employees | No | The FLSA does not require it |
| Overtime under a union contract beyond FLSA rules | No | The IRS excludes overtime required only by other laws or agreements |
The IRS gives the double time case directly: “if an employer pays double the individual’s regular rate for hours worked over 40 in a workweek, only the one-half portion that is relied upon to comply with the FLSA requirement is qualified overtime compensation.” It also says that an employee who is not eligible for FLSA overtime “does not receive qualified overtime compensation regardless of other laws or circumstances (such as a collective bargaining agreement).”
Examples: total overtime vs qualified overtime
These examples use a regular rate of $30.00 an hour. The FLSA premium is $15.00 for each hour over 40. Our overtime calculator handles the paycheck side for other rates.
Example 1: a 46 hour week
Example 2: daily overtime in California, 40 hour week
A California employee works 10, 10, 8, 8, and 4 hours. California pays overtime after 8 hours a day, so 4 hours earn time and a half, but the week never passes 40 hours. Our guide to California overtime laws covers the daily rule.
The same split appears in other states with daily rules, such as Nevada and the manufacturing rule in Oregon.
Example 3: double time for hours over 40
An employer’s policy pays double time for every hour over 40. The employee works 45 hours.
In all three cases, a payroll export that reports total overtime pay or total premium would overstate code TT. The fix starts in the time records, where hours over 40 in the workweek have to be identifiable on their own, separate from daily or policy overtime.
What to record for every employee
The Department of Labor’s Fact Sheet #21 lists the records employers must keep for non exempt workers. The ones that matter for overtime are:
- The time and day of the week when the employee’s workweek begins.
- Hours worked each day and total hours worked each workweek.
- The basis of pay and the regular hourly rate, including bonuses and other pay that must be added to it.
- Total straight time earnings and total overtime earnings for the workweek.
- Total wages paid each pay period, and the date of payment.
Payroll records must be kept for at least three years, and time cards for two. Code TT adds one more field to keep, the federally required premium for each workweek, so the annual total can be added up and checked. If your company operates in a state with daily overtime, also record start and end times, because daily totals decide state overtime. Our guide to employee timekeeping covers rounding and records in more detail.
How to track overtime: log, spreadsheet, or software
There are three common ways to track overtime, and the right one depends on the size of the team and how many rules apply.
| Method | Works well when | Where it breaks down |
|---|---|---|
| Paper overtime log | A few employees, one location, weekly overtime only | Totals are added by hand, and records are easy to lose before the 2 to 3 years they must be kept |
| Overtime tracking spreadsheet | Small teams with a payroll person who maintains formulas | Every edit is manual, versions multiply, and daily, weekly, and policy overtime are hard to keep apart |
| Overtime tracking software | Teams of any size, several states, or approvals before payroll | Needs setup: workweek start, overtime rules per employee, and rates |
Whichever method you use, employee overtime tracking holds up better when people record time as it happens rather than at the end of the week, and when managers approve hours weekly before payroll runs. Lock approved weeks as well, so the hours that went to payroll match the hours on record when W-2s are prepared.
Overtime tracking in actiTIME
actiTIME is a time tracker that also works as an overtime tracker for teams. Employees log time against tasks in a weekly timesheet or as start and stop times in Calendar View, and managers approve each week.
- Overtime Registration calculates overtime automatically for each user against their work schedule, or lets employees enter it manually, depending on the setting you choose.
- The Time Balance and Overtime Report shows worked time, scheduled time, and overtime for every user, and exports to CSV for payroll.
- An overtime rate in each user’s profile feeds the Cost of Work Report, which shows overtime cost by project and customer.
- Approved weeks can be locked, so payroll and year end reporting use the same hours.
For a step by step setup, see how to manage overtime with actiTIME. If overtime keeps growing, our guide on how to reduce overtime covers finding the cause.
Common overtime tracking mistakes
-
Reporting total overtime pay as code TT.
Code TT is only the federally required premium. Reporting the full time and a half overstates it by a factor of three.
-
Counting state daily overtime as qualified.
Daily overtime in a week of 40 hours or less is not required by the FLSA, so it stays out of code TT even though it is paid.
-
Leaving bonuses out of the regular rate.
Nondiscretionary bonuses raise the regular rate, which raises both the overtime pay and the qualified premium.
-
Tracking overtime for exempt staff the same way.
Overtime paid to an exempt employee may be a good policy, but it is not qualified overtime.
-
Changing hours after payroll.
Edits to approved weeks make the W-2 total disagree with the pay records. Lock weeks once they are paid.
FAQ
What does qualified overtime tracking mean?
It means keeping a separate running total of the overtime premium the FLSA requires, the “half” in time and a half for hours over 40, so it can be reported on Form W-2 in box 12 with code TT. Employees use that figure to claim the federal overtime deduction.
What is overtime tracking on my paystub?
Labels differ between payroll systems. A line about qualified or tracked overtime is most likely your employer’s running total of the premium it will report in box 12, code TT. Ask your payroll team if the label is unclear, because that total is the starting point for your deduction.
How do you track overtime in 2026?
Record daily and weekly hours, the regular rate with all required pay included, and overtime pay as before. Then separate the premium for hours over 40 in each workweek from any daily, contract, or policy overtime, and keep that figure for the code TT total at year end.
Does state daily overtime count for the deduction?
No, unless the same hours are also over 40 in the workweek. The IRS limits qualified overtime to compensation required under section 7 of the FLSA.
What is the best overtime tracking software?
The best fit is a tool that records hours against a fixed workweek, applies overtime rules per employee, supports weekly approval and locking, and exports clean data to payroll. If you also need overtime costs by project or client, look for software that ties hours to tasks and rates, as actiTIME does.
Two numbers, one record
Overtime tracking now produces two figures, the overtime you pay and the qualified overtime you report. Both come from the same time records, so most of the work is approving those records every week and keeping hours over 40 visible on their own.
To see how that works with your team, start a free trial of actiTIME. It runs for 30 days with every feature included, and afterward you can keep the permanent free version for teams of up to 3 users.
