In the last couple weeks, we have presented at both Labor Relations and SDASBO about the hot topics surrounding the One Big Beautiful Bill Act. We received countless questions regarding the new reporting for overtime compensation and promised a blog post. Here it is!
Understanding Qualified Overtime Compensation
Under the new law, employees may deduct up to $12,500 of qualified overtime compensation annually ($25,000 for joint filers) starting with overtime earned on or after January 1, 2025. However, it's essential to note that this deduction applies only to the "premium" portion of overtime pay, the additional amount paid above an employee's regular hourly rate, typically the "half" in a "time-and-a-half" scenario. For instance, if an employee's standard hourly rate is $20 and they earn $30 during overtime hours, the $10 difference is considered qualified overtime compensation.
To qualify, the overtime must be:
Required by the Fair Labor Standards Act (FLSA): Only overtime mandated under Section 7 of the FLSA is eligible.
Reported on IRS Forms: Overtime pay must be reported on Form W-2
The IRS released information about the “no tax on overtime” here. It's important to remember that while the deduction reduces federal income tax liability, the overtime pay remains subject to payroll taxes such as Social Security and Medicare.
Reporting Requirements for Employers
For the 2025 tax year, the IRS has provided transition relief, allowing employers to use a reasonable method to approximate the amount of qualified overtime compensation for reporting purposes. While the 2025 W-2 form will remain unchanged, the 2026 form will be revised. Here is what the IRS published. For 2025, employers are required to report the overtime information on Form W-2 using code "TT" in Box 12.
Accounting Software
Now is the time to reach out to your accounting software provider to determine what updates will be in place for compliance. We know many but not all schools work with SUI. According to SUI, they intend to provide a report schools can generate that will show the estimated amount for this year that schools can share with their employees. To note, the report would only be useful if the schools had a separate pay code defined and used for overtime this year. For 2026, schools will want to make sure they have a separate overtime pay code defined and used to pay overtime. This will allow accounting systems to calculate and report the correct amount on the W2s (in the designated box) for the applicable employees. When discussing this matter with SUI, they indicated they will review these details during their end of calendar year trainings this year. If you don’t use SUI, we recommend contacting your payroll software provider or third-party administrator to discuss these reporting obligations for both 2025 and 2026.
If this all gives you a headache, feel free to 1) binge listen to Taylor Swift’s new album to take the edge off or 2) give us a call at 402-804-8000.