IRS Publishes Revised 2026 Fact Sheet for Qualified Compensation
At A Glance
- The Internal Revenue Service (IRS) issued Fact Sheet FS-2026-13 on August 6, 2026, updating and superseding prior qualified overtime compensation guidance issued in January 2026.
- The revised fact sheet provides additional clarification regarding deduction eligibility, applicable limits, timing considerations, and Fair Labor Standards Act (FLSA) coverage and exemption requirements.
- New guidance addresses employer and payor reporting obligations, including reporting requirements for Forms W-2, 1099-MISC, and 1099-NEC.
- The IRS also provides additional information regarding federal income tax withholding procedures and the requirement to separately report qualified overtime compensation to support an individual’s deduction claim.
Summary
On August 6, 2026, the IRS issued Fact Sheet FS-2026-13, which updates and supersedes the agency’s prior qualified overtime compensation guidance released in January 2026 under FS-2026-1. The updated fact sheet provides additional information regarding the qualified overtime compensation deduction established by the One Big Beautiful Bill Act (OB3). Specifically, the IRS expanded guidance on:
- Deduction eligibility requirements
- Annual deduction limits
- Timing considerations for claiming the deduction
- FLSA coverage and exemption rules
- Federal income tax withholding procedures
- Employer and payor information reporting requirements
- Separate reporting requirements for qualified overtime compensation
Next Steps
Employers should review the updated IRS guidance and evaluate their existing payroll processes to ensure they are accurately identifying, calculating, withholding, and reporting qualified overtime compensation. Employers should particularly focus on:
- Determining whether workers are properly classified as employees or independent contractors under applicable Department of Labor FLSA and IRS Independent Contractor guidance.
- Identifying employees whose overtime compensation may qualify for the deduction.
- Reviewing payroll and year-end reporting processes to support separate reporting of qualified overtime compensation on Form W-2, where required.
- Confirming appropriate reporting of qualified overtime compensation paid to non-employees on Forms 1099-MISC or 1099-NEC, as applicable.
- Assessing whether any reporting changes are needed to comply with the IRS guidance before year-end reporting.
Employers remain responsible for determining whether workers should be classified as employees or independent contractors and for complying with applicable reporting requirements. For information regarding Paylocity support for OB3 reporting requirements, refer to the following PEAK resources:
Thank you for choosing Paylocity as your valued service partner. This information is provided as a courtesy, may change, and is not intended as legal or tax guidance. Employers with questions or concerns outside the scope of a Payroll Service Provider are encouraged to seek the advice of a qualified CPA, Tax Attorney, or Advisor.
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