Union contractors pay overtime under two different sets of rules. The split I walk through most is FLSA overtime vs daily overtime for union employees, because the union contract and the Fair Labor Standards Act do not count the same hours. That union contract is the collective bargaining agreement, or CBA—the formal name for the deal with the local.

The union contract usually requires daily overtime—time-and-a-half after eight hours in a day, and often double-time after ten or twelve. The Fair Labor Standards Act requires overtime only after 40 hours in a workweek. When an employee works daily overtime under the union contract but stays under 40 hours for the week, that daily overtime does not count as FLSA overtime. Keeping those hours apart is what makes union payroll overtime accurate, and it is what produces the qualified overtime compensation an employee can claim.

Employees hear "tax-free on overtime" and assume every hour over eight qualifies. It does not. Only the premium portion of overtime that the FLSA requires (the extra half of time-and-a-half for hours over 40 in a workweek) is qualified overtime compensation. That amount is what the deduction for qualified overtime compensation uses, and employers report it on Form W-2 in Box 12, code TT. It is sometimes called the Trump overtime tax credit or deduction, but it is a deduction, not a credit. Daily overtime for union employees, weekend premiums, and double-time that go beyond what the FLSA requires do not qualify. If the pay stub and year-end reporting do not separate daily overtime vs weekly overtime, employees cannot tell what they can claim, and the contractor has no clean way to report the correct amount.

How to Track FLSA Overtime Separately from Daily Union Overtime

Keep two overtime buckets for every non-exempt employee:

  • Daily overtime under the union contract (daily thresholds, double-time, and any other premiums the agreement requires)
  • FLSA overtime (hours over 40 in the workweek, calculated at 1.5 times the regular rate)

Only the FLSA premium—the extra 0.5 times the regular rate on those hours over 40—is qualified overtime compensation. Everything else is still paid correctly under the union contract, but it is not part of the deduction for qualified overtime compensation.

The hours by day are the same kind of hours you list on a certified payroll report when the job requires one. That report does not take the place of the FLSA premium. The premium still has to be stored on its own so the W-2 amount is only the half-time the FLSA requires.

How to Show the Split on the Pay Stub

A single "overtime" line is what creates the disputes I hear. Employees need to see the split so they can verify it themselves:

  • Hours paid at the union-contract daily rate
  • Hours paid at the FLSA weekly rate
  • The dollar amount of the FLSA premium only (the half-time portion)

A short note or second line that says "FLSA premium (hours over 40)" next to the total keeps the conversation short. When the numbers match what the employee expects, the "you shorted me" calls drop. When they do not match, both sides can see exactly which hours were treated which way.

What to Report in W-2 Box 12, Code TT

For wages paid in 2026, employers must report qualified overtime compensation on Form W-2 in Box 12 using code TT. That amount is only the FLSA premium. It is not the full overtime wage, and it is not daily overtime for union employees.

The W-2 is furnished to employees in early 2027. Employees use the Box 12, code TT figure when they file their 2026 return and claim the deduction for qualified overtime compensation. The IRS guidance states that, for tax years after 2025, employees generally may not claim more than the amount the employer reports in Box 12, code TT. If the amount is missing or understated, the employee must obtain a corrected Form W-2c before claiming a larger deduction.

Overtime pay is still subject to federal income tax withholding, Social Security, and Medicare. The deduction is claimed on the return; it does not reduce withholding during the year unless the employee updates Form W-4.

What Employees Need When They File in 2027

Employees will look for Box 12, code TT on the 2026 W-2. That is the number they use for the deduction for qualified overtime compensation (subject to the annual limits and income phase-outs). A clear pay stub that already separated the FLSA premium from daily overtime under the union contract makes it easier for them to reconcile the W-2 and reduces the number of correction requests after the forms go out.

What to Watch For

  • Systems that lump all overtime into one earnings code. Daily overtime under the union contract and weekly FLSA hours must be calculated and stored separately.
  • Reports that show total overtime hours but not the FLSA premium dollars. Employees need the dollar amount that will later appear in Box 12, code TT.
  • Year-end processes that do not isolate the FLSA premium before the W-2 file is generated.
  • Employees who move between locals or classifications mid-year. Confirm the regular rate used for the FLSA calculation is correct for each period.

Contractors who keep the two calculations separate, show the FLSA premium clearly on the stub, and report only that premium in Box 12, code TT give employees a clean number to use when they file their 2026 returns in 2027. Getting FLSA overtime vs union contract overtime right on both the pay stub and the W-2 is what prevents the follow-up questions later.

If you are sorting out how to track daily overtime for union employees and FLSA weekly overtime side by side so the pay stub and the W-2 both make sense to the employee, we can walk through the practical steps other contractors are using. Reach out at rateandfringe.com/contact.