Beginning with tax year 2025, the One Big Beautiful Bill Act (“OBBBA”) added a new above-the-line deduction for employees with “qualified overtime compensation” received during the taxable year that is included on statements furnished to them. This deduction is effective through 2028.
Qualified overtime compensation is defined as “overtime compensation paid to an individual required under section 7 of the Fair Labor Standards Act of 1938 that is in excess of the regular rate (as used in such section) at which such individual is employed.”
The Fair Labor Standards Act requires employers to pay overtime for hours actual hours worked exceeding 40 hours per week at a rate not less than one and one-half times the regular rate of pay. Thus, for purposes of the deduction, qualified overtime compensation is generally the “half” portion of “time-and-a-half” compensation. As such, only a portion of double time would count as qualified overtime compensation.
In addition to the deduction, the OBBBA imposes additional reporting requirements on employers and payors. Employers and payors must include on the written statement furnished to employees (Form W-2) and payees (Form 1099) the total amount of qualified overtime compensation. Payors must also include a separate accounting of this compensation on the information return filed with the IRS.
For tax year 2025 only, the IRS has issued relief for these reporting requirements. The IRS will not impose penalties under section 6721 (for failure to file correct information returns) or 6722 (for failure to furnish correct payee statements). This relief recognizes that employers may not have had the systems or procedures in place to be able to correctly file the additional information with the IRS and furnish such information to employees/payees. Additionally, the IRS has not updated Form W-2 and Form 1099 for this new law.
However, the relief only applies to tax year 2025, and the IRS is updating Form W-2 and Form 1099 in 2026 to include a dedicated field for qualified overtime compensation. As such, employers and payees need to separately track qualified overtime compensation for tax year 2026 and should be reviewing their payroll systems now.
Employers are still encouraged to provide employees with separate accountings of overtime compensation for 2025 such that the employee or payee has the information needed to determine if the employee or payee can claim the deduction. The IRS recommends providing this information in Box 14 of Form W-2 or providing a separate statement. However, if an employer has not separately tracked qualified overtime compensation, it should avoid certifying such amount on the W-2 and instead consider providing the employee with a supplemental disclosure informing them of their total overtime compensation for the year and recommending the employee work with his or her tax professional to determine the allowable deduction.
If you have any further questions, contact Christopher Nuss, Rachel Martinez, or your BrownWinick attorney.