Employer Reporting of Overtime Pay:
The IRS came out with guidance stating that the 2025 W-2 forms are not going to be changed to reflect the new law, but they will be for 2026. The draft 2026 W-2 shows that qualified overtime pay will be reported in Box 12 using code TT.
Even though the forms are not changing in 2025, the provisions still apply. Employers are required to track the qualified overtime pay and furnish a statement to the employees showing the total amount of qualified overtime pay for all of 2025. This is retroactive to 01/01/2025.
What to Track – FLSA-qualified overtime premium pay
Many employers’ software track overtime pay, but it may not be the right amount for the employee deduction. The deduction applies specifically to overtime compensation required under Section 7 of the Fair Labor Standards Act (FLSA). Overtime paid under contractual agreements or state law does not qualify unless it also satisfies the FLSA’s definition of overtime. FLSA’s definition of overtime can also be different than prevailing wages rates. The deduction applies to the “half” portion of “time-and-a-half” compensation paid for hours worked over 40 in a week under the Fair Labor Standards Act (FLSA).
For example, if the employee’s standard rate is $20/hour and they are paid $30/hour for overtime hours, only the $10 differential qualifies for the deduction. The $10 is the premium pay or the “Half” portion referenced above.
Additionally, only the overtime paid for hours over 40 hours qualifies. Overtime paid during the week on a specific day would not count for the deduction if total hours for the week were less than 40. An employee who worked 38 standard hours and 5 overtime hours in a week would only be allowed a deduction for the premium portion of the 3 overtime hours.
Employers should not change or adjust any federal or state withholding based on this new deduction.
How to track
While some companies may be already able to track this, it is more likely that employers will have to adjust how time is tracked even for those who have sophisticated payroll systems. This is specifically important to contractors as many maintain their own payroll to properly track wages to jobs. Create or update your systems or calculation as possible to properly record the qualified amounts in your payroll systems and provide the qualified amount to your employees for 2025.
Anticipating that this may be a burdensome calculation, the OBBBA includes a transition rule for 2025 allowing employers to approximate a separate accounting of amounts designated as qualified overtime compensation by any reasonable method specified by the Secretary of Treasury. We expect additional guidance to be released.
Employee Treatment
Employees will not see a change in their take-home pay and the withholding tables for 2025 will not change. It is the employee’s responsibility to claim the new deduction when they file their tax returns. They will be able to claim the new deduction as a “above the line” deduction on their federal income tax return even if they take the standard deduction. Many states do not automatically conform to new federal tax laws, which means their state tax liability might not be affected by this change.
The maximum annual deduction is $12,500 for single filers and $25,000 for joint filing taxpayers. These deductions are subject to phase out on the employee’s personal tax return beginning at $150,000 for single filers and $300,000 for joint filers, the income limited is based on modified adjusted gross income.
We recommend that you educate all your employees about this new deduction and go over it with them prior to the end of the year. It is likely that employers will be the main resource for employees who have questions about how it works. You may also have to temper expectations regarding the “no tax on overtime” headlines as many will think all overtime pay qualifies. Also, it is a temporary deduction and only applies to tax year 2025-2028 unless congress extends it at later date.
Next Steps
Employers should start developing a system to track and report the “FLSA-qualified overtime premium pay” amount that qualifies for the new deduction. The sooner you develop a method for reporting, the easier it will be to report the information.
Look out for new guidance in the coming months. The IRS is expected to provide further instructions, including a “reasonable method” for approximating qualified overtime for the 2025 tax year.
Ensure employees are aware of the new deduction and that it is their responsibility to claim it on their annual federal income tax return. Without a code on the W-2 form for 2025, it will be especially important for them to provide their tax preparer with this information to claim the deduction or properly report it on their tax return if they prepare their own tax return.
Here is a link to our podcast on the subject before IRS transitional guidance that removed W2 required reporting for 2025:
https://myboyum.com/business-tax/the-big-beautiful-breakdown-no-tax-on-overtime-what-that-really-means/