No tax on OT and Compr Time

Forum|Forum|18 days ago
August 6, 2026
10 replies
142 views

How does comp time figure into no tax on OT? If I save 120 comp hours, and then take 10 days off of work using those hours wouldn't I be paying more taxes than if I just took the cash overtime? How does it work when it comes to comp time? does the tax exemption mathematically scales to match cash overtime exactly? Is the tax-free "overtime premium" protected whether it is paid out immediately as cash or delayed and taken as paid time off? Does the IRS apply the tax exemption proportionally?

Not A Product Question

Best answer by NCperson

how you or I interpret may be a moot point. It’s how your employer interprets it as it must appear as a separate box on your 2026 W-2 for it to be deductible. For 2026, you can only deduct what is listed on the W-2 as the qualified overtime amount. Box 12/ code TT will indicate the amount of qualified overtime that can be deducted.

DoninGA

Level 15

Banked compensatory time off in lieu of cash yields no tax deduction because no overtime compensation has actually been paid.

Taking paid time off using your accrued hours provides no new overtime pay and therefore qualifies for no tax deduction.

gjgogolAuthor

Level 5

@DoninGA Do you change your response based on Q18 from Fact Sheet FS-2026-13 "Updates to questions and answers about the new deduction for qualified overtime compensation?

rjs

Level 15

You might be entitled to a deduction for compensatory time off if you are a government employee. The rules are complicated. See Q17, Q18, Q27, and Q28 in Fact Sheet FS-2026-13 "Updates to questions and answers about the new deduction for qualified overtime compensation," which the IRS just issued today (Aug. 6, 2026).