Your payroll system probably pays overtime on the wrong rate.
Overtime must be paid on the regular rate of pay — recomputed every workweek, and required to include nondiscretionary bonuses, commissions, and shift differentials. Payroll systems get this wrong routinely enough that finding the errors is a $500/hour cottage industry for litigation economists — after the lawsuit is filed.
The error is invisible on a paystub. $20/hour, 50 hours, a $200 attendance bonus: the regular rate that week is $24, not $20, and the employee is $20 short on overtime while the OT line looks exactly right (the arithmetic, with sources). Multiply by headcount and weeks.
I build software that runs that same audit on your own payroll register and time-punch exports — before a plaintiff's lawyer does.
Three reasons this landed on your desk in 2026
- W-2 Box 12 code TT is mandatory for tax year 2026. The "no tax on overtime" number due on W-2s in January 2027 is the FLSA overtime premium computed off the regular rate — a number most payroll systems have never stored. Getting it wrong carries information-return penalties of up to $330 per form (IRC §§6721/6722). Read the employer guide →
- California's PAGA reform rewards a documented audit. A periodic payroll audit is a statutory "reasonable step" that caps PAGA penalties at 15% — an ~85% reduction the legislature wrote into the 2024 amendments.
- Regular-rate errors are formulaic and class-certifiable. No he-said-she-said — just arithmetic, provable from your own data, identical across every employee in a pay group. That's what makes them a plaintiff lawyer's favorite claim, and a computer's easiest catch.
How the audit works
- Export. Your payroll register + time-punch detail (CSV from ADP, UKG, Workday, Paylocity — the same files litigation subpoenas). Pulling both is typically under an hour of your team's time.
- Recompute. The engine rebuilds legal workweeks from punches, recomputes the regular rate per employee per week — nondiscretionary bonuses, differentials, Alvarado flat-sum divisors, Ferra premiums, retroactive bonus true-ups under 29 CFR 778.209 — and diffs it against what was actually paid.
- Report. Green (documented clean audit — your "reasonable steps" artifact), yellow (data-quality gaps), or red (quantified findings + correction file). Built to be commissioned by counsel, under privilege.
Start with the free exposure snapshot
One quarter of your payroll + time data. I compute the gap for every employee, every workweek, and send it back ranked by pay code. No charge, no obligation — and if the audit comes back clean, you'll have that documented too.
Request the free snapshot Try the TT calculator firstFree tools & guides
W-2 Box 12 Code TT Calculator
Compute the qualified overtime premium for a workweek — and see how far the ÷3 estimate is off when bonuses exist.
The Employer's Guide to Code TT
What goes in the box, what's excluded, why the shortcut fails, and the five-step dry run to do before January.
More employer guides — regular rate of pay, California overtime, PAGA payroll audits — in the learn hub.