New Mexico workers put in a lot of overtime. Permian Basin crews in Lea and Eddy counties, hospital staff in Albuquerque, and line workers at the state’s food processors routinely clear fifty-hour weeks, and many of them expected the federal deduction for overtime pay to show up as a bigger refund next spring. Whether it does now depends on a single entry on the W-2 their employer files, and the IRS’s revised guidance, Fact Sheet FS-2026-13 (Aug. 6, 2026), makes that entry a hard ceiling. New Mexico employers have a second layer to sort through, because the state’s own overtime law doesn’t line up with the federal one, and New Mexico workers have a third surprise waiting: the state income tax return gives them nothing.
🎙️ Listen to this article · North Star Tax and Legal Briefing
Listen on Podbean · 4 min 40 sec
Read the episode transcript
A Carlsbad service hand works sixty hours a week all season long. He hears there’s a new federal deduction for overtime pay, he runs the math on his own pay stubs, and he figures twelve thousand five hundred dollars is coming off his taxable income next spring. He might be right. He might also be capped at whatever single number his employer typed into one box on his W two, and if that number is wrong, he cannot fix it himself. For twenty twenty-five, workers could reconstruct overtime from their pay stubs. Starting with twenty twenty-six wages, that door is closed. The form controls, and the employer holds the pen.
Here’s the deduction in plain terms. For tax years twenty twenty-five through twenty twenty-eight, an employee can deduct up to twelve thousand five hundred dollars of qualified overtime pay, twenty-five thousand on a joint return, and it phases out above a hundred fifty thousand dollars of modified adjusted gross income, three hundred thousand joint. Two things surprise people. First, only the premium half of time-and-a-half counts. Not the whole overtime check. Just the extra half. Second, and this is the one that matters here: only overtime that federal wage and hour law actually requires is qualified. Overtime you are paid for any other reason is still overtime. It simply is not deductible overtime. Hold onto that distinction, because New Mexico runs two overtime laws at once, and they do not agree with each other.
New Mexico’s minimum wage act requires time-and-a-half after forty hours, and it applies to employers of every size. Federal coverage generally starts at five hundred thousand dollars in annual sales. So a Silver City auto shop or a Clovis landscaper running three hundred fifty thousand dollars owes overtime under state law that federal law never required. That premium is real, the employer must pay it, and it is not qualified. It does not belong in the box.
Now the part that cuts the other way. New Mexico’s statute excludes forepersons, superintendents, supervisors, and workers paid on commission, piecework, or flat rate. Federal law treats those categories differently. So a working foreman at an Albuquerque machine shop may be owed federal overtime that does qualify, even though state law exempts him completely. Before you lean on that exemption, confirm he meets the federal duties test and the six hundred eighty-four dollar weekly salary floor, because the broader state exclusion will not protect you federally. And public employers sit outside the state act altogether. Their people often bank compensatory time instead of cash, and banked time is not overtime compensation paid. Nothing is reported until it is cashed out.
Now the arithmetic, because this is where payroll quietly fails. That Carlsbad hand: twenty-eight dollars an hour, sixty hours, a six hundred dollar weekly per diem, a two hundred fifty dollar production bonus. The rate you compute the premium on is not twenty-eight dollars. Straight time is one thousand six hundred eighty dollars, the bonus goes in because it is not discretionary, the per diem stays out, and the real rate is thirty-two dollars and seventeen cents. The qualified premium that week is three hundred twenty-one dollars and sixty-seven cents. Ignore the bonus and you report two hundred eighty. Fold in the per diem and you report four hundred twenty-one and sixty-seven, handing the employee a deduction he is not allowed to take. And understatement is the expensive direction: a question about one box in January can surface unpaid overtime, which in New Mexico carries twice the unpaid wages on top.
Three things before year-end processing locks this in. First, sort your workforce into three buckets: people owed federal overtime, people owed only state overtime, and people exempt under both. Configure payroll to compute the overtime box for that first bucket only. Second, put a separately stated overtime premium line on the pay receipt, so an employee can check it against the form in January instead of filing a complaint in March. Third, tell your people now: this is a federal deduction only, their withholding will not change unless they file a new withholding form, and their New Mexico return will look like last year’s. That’s what we do at North Star Law Firm. The initial consultation is free, and the full written analysis with citations is at nm-legal.net.
What did the IRS change in August?
The deduction under 26 U.S.C. § 225 allows up to $12,500 of qualified overtime compensation ($25,000 on a joint return) to be deducted for tax years 2025 through 2028, phasing out above $150,000 of modified adjusted gross income ($300,000 joint). For 2025, the IRS let employees reconstruct the figure from pay stubs. Beginning with 2026 wages, FAQs 20 through 23 of the revised fact sheet say the employee may deduct only what was actually paid as qualified overtime and reported in Form W-2, Box 12, Code TT, whichever is less. An understated W-2 caps the deduction until the employer issues a Form W-2c, and the substitute Form 4852 doesn’t cure the problem. FAQ 11 requires the employer to correct errors as soon as possible or face penalties under 26 U.S.C. §§ 6721 and 6722. Withholding doesn’t drop automatically; the employee must file a new Form W-4 using Step 4(b). And only the premium half of time-and-a-half counts, computed under Fair Labor Standards Act rules.
Which New Mexico overtime counts and which doesn’t?
This is where New Mexico employers face a problem Texas employers don’t. Under NMSA 1978 § 50-4-22(D), the New Mexico Minimum Wage Act requires time-and-a-half after forty hours in a seven-day week, and it applies to employers regardless of size. The FLSA’s enterprise coverage generally requires $500,000 in annual sales, so a small Taos restaurant, a Silver City auto shop, or a Clovis landscaper with $350,000 in revenue may owe overtime under state law that the FLSA never required. Section 225 counts only FLSA-required overtime, so that state-mandated premium isn’t qualified, and the employer shouldn’t report it in Code TT even though it’s paying it. The exemptions run in both directions. New Mexico’s statute excludes forepersons, superintendents, supervisors, and workers paid on commission, piecework, or flat rate under § 50-4-21(C), categories the FLSA treats differently, so a working foreman at an Albuquerque machine shop may be owed federal overtime that qualifies even though state law exempts him. Public employers are outside the state act entirely, and their employees commonly receive compensatory time under 29 U.S.C. § 207(o) rather than cash. Comp time isn’t overtime compensation paid, so state, county, and municipal workers who bank hours instead of dollars get no Code TT entry for them.
How does the calculation work for a Permian Basin crew?
Take a Carlsbad service-company hand at $28 an hour who works 60 hours in a week, receives a $600 weekly per diem while away from home, and earns a $250 weekly rig bonus tied to production. The FLSA regular rate is the week’s total pay spread over all hours worked; the nondiscretionary bonus goes in, while a reasonable per diem that reimburses expenses stays out. Straight-time pay is $1,680, the bonus adds $250, so the regular rate is $32.17, not $28. The qualified premium is 20 overtime hours times half of $32.17, or $321.67 for the week. A payroll system that ignores the bonus reports $280, and one that improperly folds the per diem into the regular rate reports $421.67 and hands the employee a deduction the IRS says he can’t take. Over a 45-week season the correct figure is about $14,475, which already exceeds the $12,500 cap for a single filer; the employer’s job is to get the number right, not to maximize it.
Will New Mexico honor the deduction on the state return?
No, and this catches almost everyone. New Mexico personal income tax starts from federal adjusted gross income. Under NMSA 1978 § 7-2-2, base income is federal AGI with adjustments, and net income is base income less either the federal standard deduction or federal itemized deductions as defined in § 63 of the Internal Revenue Code. The overtime deduction is neither. Congress placed it in § 63(b), alongside the standard deduction, and § 63(d) expressly excludes § 63(b) items from the definition of itemized deductions. It never reduces AGI, so it never enters the New Mexico computation. The Taxation and Revenue Department confirmed as much in its July 31, 2025 briefing to the Legislature, listing the overtime and tips deductions among the federal changes New Mexico doesn’t pick up. A bill to add a matching state deduction, House Bill 264, was introduced in the 2026 session and postponed indefinitely on February 2, 2026. For the Carlsbad hand above, the $12,500 federal deduction saves roughly $2,750 at a 22 percent federal rate, but his New Mexico tax, at rates that reach 4.9 percent in his bracket, is unchanged. Employers should say so plainly when employees ask, because the state refund won’t move.
What state-law tools do New Mexico employees have to check the number?
More than employees in most states. NMSA 1978 § 50-4-2(B) requires every pay statement to show gross pay, hours worked, total wages and benefits earned, and an itemized list of deductions. An employer that adds a separately stated overtime premium line to that receipt gives employees a running total to compare against Box 12 in January and gives itself a contemporaneous record if the IRS or the Department of Workforce Solutions asks. That matters because the state’s wage-claim remedies are severe: an employer that underpays wages owes the shortfall plus interest and an additional amount equal to twice the unpaid wages under § 50-4-26. A dispute that begins as a question about a tax form can end as a treble-damages wage claim if the underlying overtime was never paid, and the deduction gives every hourly employee a reason to look.
What should a New Mexico employer do before the 2026 W-2s?
Map the workforce into three groups: employees owed FLSA overtime, employees owed only state overtime, and employees exempt under both. Configure payroll to compute Code TT on the FLSA regular rate for the first group only, with bonuses and differentials included and reasonable per diems excluded. Add a premium line to the pay receipt. Write a correction procedure so that a January question about Box 12 produces a W-2c in weeks rather than a complaint in months. Confirm that any employee treated as an exempt supervisor meets the federal duties test and the $684 weekly salary floor, because New Mexico’s broader supervisor exclusion won’t protect the employer under federal law. And tell employees now that the deduction is federal only, that their withholding won’t change unless they file a new W-4, and that the state return will look the same as last year.
| New Mexico worker | State overtime owed? | FLSA overtime owed? | Qualified for § 225? |
|---|---|---|---|
| Hourly hand, $2M-revenue oilfield service company | Yes | Yes | Yes, premium half on FLSA regular rate |
| Cook at a $350,000-revenue restaurant with no interstate commerce | Yes | Generally no | No; state-only overtime isn’t qualified |
| Working foreman, non-exempt under FLSA duties test | No (state exclusion) | Yes | Yes |
| County road crew member receiving comp time | Not covered | Yes, but paid in time | No, until comp time is cashed out as overtime pay |
| Commission salesperson at a retail store | No (state exclusion) | Depends on § 207(i) | Only if FLSA overtime is actually owed and paid |
Frequently Asked Questions
Can New Mexico workers deduct overtime on their state income tax return?
No. New Mexico net income starts from federal AGI and subtracts only the federal standard or itemized deductions. The overtime deduction is a § 63(b) deduction that never reaches the state computation, and the 2026 bill to add a state version died in committee.
Does overtime required only by the New Mexico Minimum Wage Act qualify for the federal deduction?
No. Section 225 covers only overtime the Fair Labor Standards Act requires. Employers below the FLSA’s coverage thresholds that pay state-mandated overtime shouldn’t report it in Code TT.
What if my employer left Box 12, Code TT blank?
Starting with 2026 wages, the reported amount is the ceiling. The only fix is a corrected W-2c issued by the employer, since the IRS won’t accept a substitute Form 4852 for this purpose.
Do per diems increase the overtime premium?
A reasonable per diem that reimburses travel expenses is excluded from the FLSA regular rate. Nondiscretionary bonuses and shift differentials are included, which raises the premium and the Code TT figure.
Do public employees who receive comp time get the deduction?
Not for banked hours. Compensatory time isn’t overtime compensation paid, so nothing is reported until the time is paid out in cash as overtime.
What penalties does an employer face for a wrong Code TT amount?
Federal information return penalties, which shrink if the correction is prompt, plus the practical risk that an employee’s question uncovers unpaid overtime, which under New Mexico law carries double damages on top of the wages.
How North Star Law Firm Can Help
North Star Law Firm helps New Mexico employers sort out which overtime is federal, which is state-only, and what belongs in Box 12, and it stands with workers whose W-2s understate what they earned. Phillip Zagotti, JD/CPA, has spent years inside payroll systems as a CPA and represents taxpayers before the IRS and the U.S. Tax Court when reporting disputes turn into examinations. The firm’s tax law practice covers employment tax planning and compliance, its business structuring practice addresses the owner-manager questions that determine exemption status, and its audit defense practice steps in when the IRS questions a payroll. Contact North Star Law Firm to get the Code TT calculation right before year-end processing locks it in.