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The IRS recently published substantial updates to its frequently asked questions (FAQs) (FS-2026-13) regarding the qualified overtime compensation (QOC) deductions introduced by 2025’s major tax law. The updates focus on the enhanced substantiation requirements for taxable years beginning in 2026, reflecting the end of relief that applied in 2025.
Last year’s One Big Beautiful Bill Act (OBBBA) allows individuals an above-the-line deduction for qualified tips and QOC received in the 2025 through 28 calendar years, subject to certain limitations and phaseouts. The new law also requires employers to separately report the amount of qualified tips (along with specified occupation details) and QOC to workers on Form W-2 or Form 1099-NEC, as applicable.
In January 2026, the IRS released FAQs (FS-2026-01) about the new QOC deduction clarifying how taxpayers can claim the incentive when filing their personal income taxes. Earlier guidance (Notice 2025-62) granted employers temporary penalty relief for 2025 from the new reporting requirements. As a result, employers and other payors were not required to separately account for QOC on Forms W-2 or 1099 for 2025.
The updated FAQs:
- Delete information that was applicable solely to the 2025 taxable year
- Provide clarification on the limits and timing of the QOC deduction
- Provide additional information on coverage and exemptions under the Fair Labor Standards Act
- Provide detailed information on Form W-2, Form 1099-MISC and Form 1099-NEC requirements applicable to employers and payors of QOC
- Add information on federal income tax withholding procedures related to QOC
- Add information on the requirement that QOC must be separately reported on Form W-2 for an employee to claim the deduction
- Provide more detailed information on issues applicable to federal employees
The updated FAQs supersede FS-2026-01 and generally apply beginning with the 2026 taxable year.
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