IRS offers guidance and transition relief for overtime reporting under new tax law
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IRS has released guidance on new reporting requirements under the One Big Beautiful Bill Act, which was signed into law on July 4, 2025. The guidance confirms that employers won’t face penalties for failing to separately report qualified overtime compensation on 2025 W-2 forms as part of a transition period.
The new law allows employees to deduct qualified overtime pay from their federal taxable income.
What the new law does
Under the new law, non-exempt employees can deduct the qualified overtime premium portion of their pay — the “half” in “time-and-a-half” — from their federal taxes for tax years 2025 through 2028. The maximum deduction is $12,500 per employee ($25,000 for joint filers), with phase-outs for higher earners.
Only overtime required under the Fair Labor Standards Act (FLSA) qualifies for the deduction. Overtime that doesn’t count includes:
- Overtime paid voluntarily by the employer
- More generous overtime required under state law
- Overtime required under a union collective bargaining agreement
- Other forms of additional compensation, like stand-by or on-call pay
Why IRS is offering penalty relief
IRS recognizes that many employers don’t yet have systems in place to track and report this information separately. That’s why the agency has designated 2025 as a transition year with penalty relief.
For 2025, contractors can use “any reasonable method” to estimate qualified overtime and provide this information to employees through Box 14 on W-2 forms, an online portal, or written statements. Starting in 2026, IRS plans to require reporting in Box 12 using a new code.
Though subject to change, IRS has published a draft W-2 form for tax year 2026 showing how employers will report qualified overtime compensation.
What HVACR contractors should do now
While you won’t face penalties this year, it’s smart to start preparing:
- Ensure your payroll system can separately track FLSA-required overtime from regular wages.
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- Identify the overtime premium of FLSA-required overtime pay.
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- Segregate these premiums for future reporting purposes.
- Decide how you’ll provide qualified overtime totals to employees for 2025
- Plan for the new W-2 reporting requirements coming in 2026
- Develop a communications plan to educate employees about which overtime qualifies for the deduction and manage their expectations — employees may not realize that only FLSA-required overtime qualifies, not all overtime pay, and that these changes only affect federal income tax deductions.
- Review the updated IRS contribution limits and catch-up rules taking effect for 401(k) and IRA plans in 2026.
In July 2024, the Department of Labor issued a final rule that would have increased the salary threshold for overtime-exempt employees to $58,656 as of January 1, 2025. However, on November 15, 2024, the U.S. District Court for the Eastern District of Texas vacated that rule. The Department of Labor is now applying the 2019 rule’s minimum salary level of $684 per week ($35,568 annually) and total annual compensation requirement for highly compensated employees of $107,432 per year.
Contractors managing overtime obligations may also want to review how overtime is calculated when employees earn commissions or bonuses, which we covered in our recent article on legally compensating technicians who receive spiffs.
IRS continues to release guidance on these provisions. ACCA will keep members updated as more information becomes available.
Posted In: Government, HR, Money, Taxes
