As part of the One Big Beautiful Bill Act, individuals became eligible to take an annual deduction in taxable earnings on their personal tax returns for qualified overtime wages paid in tax years 2025 through 2028. While the law was signed on July 4, 2025, qualified overtime wages earned by individuals between January 1 and December 31, 2025, can be used to take the deduction on taxable earnings when filing their 2025 federal personal income tax returns.
Qualified overtime is defined as the premium paid as overtime wages in accordance with the Fair Labor and Standards Act (FLSA). Under the FLSA, wages paid for hours worked in excess of 40 hours in one week are required to be paid at time-and-a-half (i.e., 1.5) of an employee’s regular rate of pay (RRP). The qualified overtime portion that an employee would be eligible for the personal income tax earnings deduction would be .5 of the RRP (i.e., the premium) for each overtime hour worked. When an employee is paid overtime compensation in accordance with FLSA, employers need to run calculations with the information on hand to isolate the overtime hours paid at half of the RRP for each respective work week in the calendar year and sum it to calculate the total qualified overtime for the year. Where employers are following state1 or union agreements that require overtime be paid daily or for less than 40 hours worked in a week, or under a union agreement that calculates the RRP differently from that of FLSA, there could be a discrepancy between FLSA overtime wages and actual overtime wages paid. In these cases, overtime earnings and, possibly, the RRP would need to be recalculated to arrive at the correct qualified overtime amount.
The Internal Revenue Service (IRS) has stated that qualified overtime wages are required to be on an employee’s Form W-2 in box 12 with code TT, effective for calendar year 2026 (i.e., on a 2026 Form W-2 issued in January of 2027). Further, the IRS issued Notice 2025-62 on November 5, 2025, stating that if employers choose to provide qualified overtime to an employee on a 2025 Form W-2, and if the qualified overtime reported would ultimately be incorrect, the employer would not be subject to penalties for failure to file or furnish a correct information return and payee statement under Internal Revenue Code Sections 6721 and 6722.
Ryan’s Take
Ryan has been closely monitoring IRS guidance to employers on qualified overtime wages since the signing of the One Big Beautiful Bill. IRS Notice 2025-62 appears to have brought closure to the IRS issuing any more guidance to employers by stating that the IRS will provide additional guidance to individuals when filing their tax returns, specifically not mentioning anything about further communication to employers.
Given the current guidance from the IRS, there is no requirement for employers to report qualified overtime wages on a Form W-2 for calendar year 2025. As a result, many third-party payroll providers will not have a solution in place for 2025. However, since employees are eligible for the qualified overtime deduction in taxable earnings on their 2025 personal tax returns, we are expecting employees to turn to their employers to obtain this information.
We recommend that employers with a workforce being paid overtime wages in excess of FLSA requirements strategize how to handle communications to employees. In addition there will most likely be a significant effort required for calculating qualified overtime wages for 2025 and through at least 2028 when the deduction remains available. Employers should work with their third-party payroll provider to identify how to obtain hours and earnings reports as necessary to calculate qualified overtime wages on a weekly basis. Employers should also prepare communications to employees around qualified overtime wages, specifically noting when any calculations will be provided for 2025. Further, employers should speak with their third-party payroll provider to identify whether any solution will be implemented for 2026.
Ryan is positioned to help companies strategize qualified overtime calculations and reporting, help with determining the qualified overtime wages to report to employees, draft a communication strategy and workplan on when qualified overtime wages will be calculated and provided to employees, and prepare a frequently asked questions document to either provide to impacted employees or have available to payroll and HR professionals to answer employee inquiries. Please contact our experts below for additional assistance.
1 Alaska, California, Colorado, Florida, and Nevada have overtime wage payment requirements that vary from that of FLSA.
TECHNICAL INFORMATION CONTACTS:
Kevin Cappock
Principal
Ryan
813.879.5127
kevin.cappock@ryan.com
Michelle Potter
Principal
Ryan
813.879.5000
michelle.potter@ryan.com
Jon Stone
Principal
Ryan
551.236.1901
jon.stone@ryan.com
The material presented in this communication is intended to provide general information only and should solely be seen as broad guidance and not directed to the particular facts or circumstances of any individual who may read this publication. No liability is accepted for acts or omissions taken in reliance upon the content of this piece. Before taking (or not taking) any action, readers should seek professional advice specific to their situation from Ryan, LLC or other tax professionals. For additional information about this topic, please contact us at info@ryan.com.
- Sujet
- Kevin Cappock
- Michelle Pink