Many employers have likely been hearing from employees about the implications of No Tax on Overtime (and Tips) after the One Big Beautiful Bill became Federal Law (OBBBA).
our payroll department or processing partner should already have a plan in place for the 2025 tax reporting season, but let this be a reminder that the IRS is waiting until the 2026 tax reporting season to enforce more heavily the employer reporting requirements for qualified overtime wages and tips paid to employees through 2028.
Where clarity is crucial…
The Fair Labor Standards Act (FLSA) has long-held that hourly non-exempt employees are entitled to overtime pay. Overtime pay is 1.5x their regular rate of pay for any time worked in excess of 40 hours in any given work week. Employers are responsible for adhering to these requirements along with any other state or local guidelines. The OBBBA has established that the half-portion (0.5) of qualifying overtime pay is eligible for the tax deduction.
Since this is new tax legislation as of this year, employers and payroll service providers have a year to establish the appropriate reporting procedures. Employers who pay employees overtime or tips must coordinate with their payroll partners (like Servant HR) so that their employees are equipped with the data they need to file their taxes for 2025.
What not to advise employees to do…
It is not as simple as employees going to their final pay stub of 2025 and finding the YTD total for Paid Overtime. The calculation becomes more complex where employers have unique parameters around overtime pay whether set by company policies or based upon the state of which the employee performs work. Think, employees working in and from states where the overtime multiplier is different from the FLSA’s standard time-and-a-half (1.5x). Or the employer has set their own overtime multiplier that is more generous than the federal requirement. And maybe they also include Paid Time Off in their calculation of overtime.
These are just a few possible scenarios to note, but employers should ensure their payroll departments and processors have a clearly laid out plan to ensure the estimated qualified amounts for overtime and tips are as accurate as possible. The IRS has already signalled they will grant penalty relief for the 2025 tax year regarding overtime and tips. Employers should consider taking the first or second quarter of 2026 to evaluate the effectiveness of their overtime pay and tipping policies (something Servant HR supports its clients with today) as the IRS will look at the 2026 tax season with a higher degree of scrutiny.
What employers can do now…
Employers should know how their employees will receive their 2025 qualified totals for overtime (and tips). One of the first places they should go to gain better clarity around this is their very own payroll department, payroll partner, or payroll software company. If it is not possible to include on 2025 form W-2s, then employers must know how their employees will receive the approximate qualified totals from 2025. Employers may decide to provide notice to employees in coordination with their payroll departments and processors that go along with the 2025 form W-2s.
