Starting with the 2026 tax year, nannies who get paid for overtime have a new federal income tax benefit they didn’t have before. Most families and nannies haven’t fully absorbed it yet, and the questions tend to land first on the agencies that placed the nanny: whether the paycheck looks different, whether the nanny is missing out on something, whether anyone needs to do anything to claim the deduction.
This is a quick reference your team can keep on hand for when those conversations start.
How the 2026 overtime deduction works
The new deduction came out of the 2025 One Big Beautiful Bill Act (OBBBA for short), which created a federal income tax break on the premium portion of overtime pay for hourly workers. The deduction goes entirely to the worker, not the employer: they can now deduct the “extra-half” of “time-and-a-half” (the premium half) from their taxable income, up to $12,500/year for individual filers or $25,000 for a married couple filing jointly. The family’s payroll cost doesn’t change. Gross wages and FICA stay the same, and the payroll calendar doesn’t shift. The savings flow to the nanny.
For a nanny earning $25/hour:
| Amount | |
| Regular hourly rate | $25.00 |
| Overtime rate (1.5×) | $37.50 |
| Premium portion (the “extra half”) | $12.50/hour |
If that nanny works 5 overtime hours per week throughout the year, the math comes out to:
| Amount | |
| Annual OT hours (5 × 52) | 260 |
| Total premium pay for the year | $3,250 |
| Federal income tax savings | ~$400–$700 (depending on bracket) |
A nanny working closer to 10 overtime hours per week at $30/hour would see a premium of $15/hour, totaling $7,800/year, still well under the $12,500 cap for an individual filer.
How it shows up on the W-2
The IRS added a new code to Box 12 of the 2026 W-2, labeled “TT” (short for “Total Qualified Overtime Compensation” per the W-2 instructions). The premium portion of qualified overtime is reported there as a single annual total. Payroll providers like NannyKeeper calculate and pre-fill this from a nanny’s pay records automatically. Families who file their own W-2s in TurboTax or by hand will need to track the premium total themselves throughout the year. A fuller walkthrough is in our 2026 W-2 guide for household employers.
Code TT was optional for tax year 2025 under transition relief, but it’s mandatory for 2026 wages, so the premium portion of overtime needs to be tracked correctly starting with paychecks paid this year.
Who qualifies for the federal deduction
The deduction is structured around the federal Fair Labor Standards Act (FLSA), which only requires overtime pay for non-live-in domestic workers. This creates two important nuances.
Live-in nannies don’t qualify. Live-in domestic workers are exempt from FLSA overtime entirely. Even if a family voluntarily pays a live-in nanny at an overtime rate for long days, those hours aren’t eligible for the deduction. The live-in nanny tax guide on our site covers the broader live-in tax picture, including the room-and-board rules.
State-required overtime doesn’t count toward the deduction either. A handful of states require overtime for nannies (including live-ins) under their own state labor laws, meaning the family still owes overtime pay in those states, but the federal deduction doesn’t apply to the state-required portion. Only the FLSA-required half qualifies.
Nine states require overtime for live-in domestic workers under their own state labor laws: California, Hawaii, Maryland, Massachusetts, Minnesota, Nevada, New Jersey, New York, and Oregon. California also has stricter daily-overtime rules (1.5× after 8 hours, 2× after 12 hours) that apply to live-ins.
In any of these states, a nanny working only state-required overtime (and no federally required overtime) won’t get the federal deduction. Agencies placing in CA, NY, or NJ in particular should know this. It’s an easy point of confusion.
How to answer family and nanny questions
When a family asks what to do, the simplest answer is usually: nothing new is required from them if they’re already using a payroll service. The provider handles the math and the W-2 reporting automatically. The savings flow to the nanny at tax time, when the nanny (or their tax preparer) claims the deduction on their federal return.
For families filing their own W-2s, the conversation is more involved: they’ll need to track the premium portion of OT throughout the year and report it correctly in Box 12. This is one of several reasons many families switch to a payroll service in their second year of nanny employment, when the W-2 paperwork starts to feel less manageable.
If you’d like a deeper reference to share with families, NannyKeeper’s full nanny overtime guide covers Code TT mechanics, the state-by-state OT table, and worked examples in more detail.
Alex Yang is the founder of NannyKeeper, a payroll service that handles nanny payroll, taxes, and compliance for families in all 50 states. Before NannyKeeper, Alex spent over a decade as a product manager at Microsoft. He writes about household-employment compliance at www.nannykeeper.com.