New Federal Tax Reporting Requirements for Overtime Compensation Coming

The IRS announced upcoming tax-reporting rules for overtime under the “One Big Beautiful Bill” (the “Bill"). While not changing how overtime is calculated or paid, the Bill introduces new reporting requirements for 2025-2028, enabling tax deductions for certain employee overtime compensation.

The Bill introduces a new above-the-line income tax deduction for eligible employees based on qualified overtime pay, as defined by law and clarified by IRS guidance. Qualified overtime includes only pay required by the FLSA. Employers must report deductible overtime to help employees claim the deduction, following federal law and IRS rules, not FLSA.

Importantly, these reporting rules do not alter employers’ overtime pay obligations under the FLSA. Employers must continue to calculate and pay overtime compensation in accordance with existing wage-and-hour law.

“Qualified” v. Not “Qualified” Overtime

The distinction between legally required overtime and premium pay provided by policy or agreement remains relevant for wage-and-hour compliance, but it does not determine taxability. For federal tax purposes, overtime compensation remains taxable wages unless a specific exclusion applies. The new deduction is expected to be claimed by employees on their individual tax returns rather than excluded from payroll wages.

Qualified overtime is overtime compensation required by the FLSA—generally, pay at one and one-half times an employee’s regular rate for hours worked beyond the applicable statutory threshold during a defined work period. Overtime compensation required solely by state or local law, and not by the FLSA, may not qualify for the federal deduction, even if it is treated as overtime for wage-and-hour purposes.

Non-qualified overtime, by contrast, arises from an employer’s policies, state or local law, a collective bargaining agreement, or other contractual arrangements rather than from an FLSA mandate. Examples include premium pay for holidays, weekends, or scheduled days off, or for exceeding internal scheduling thresholds that fall below the legal overtime limit.

While both forms of compensation are generally treated as taxable wages, only qualified overtime satisfies statutory overtime obligations. The two categories may require different treatment for payroll tracking and tax reporting once IRS reporting requirements are finalized.

Employer Reporting Expectations 

The statute envisions that employers will separately identify and report qualified overtime compensation on employee wage statements, such as Form W-2, to support employee eligibility for the deduction. For the 2025 tax year, the IRS has provided “transitional relief,” meaning that the IRS will not penalize employers who do not separately report qualified overtime compensation while reporting mechanisms are being finalized.

In future tax years, employers should expect more formal reporting requirements once the IRS updates forms, instructions, and related guidance. Employers should begin evaluating now whether their payroll systems can distinguish among base wages, overtime premiums, and other forms of premium pay in anticipation of mandatory separate reporting.

Employers should monitor IRS guidance, coordinate with payroll providers, and prepare systems to track overtime premium amounts separately in anticipation of future reporting requirements.