The Department of the Treasury and the Internal Revenue Service recently issued Fact Sheet 2026-01 related to the “no tax on overtime” provision in the One Big Beautiful Bill Act (OBBBA), which President Trump signed into law last year.
If you attended our recent K|W|W Client Seminar, you may remember that we covered this topic during our Legislative Update session. If you missed it (or want a quick recap), here is what you need to know:
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The OBBBA created a new federal income tax deduction, applicable for tax years 2025 through 2028, for individuals who receive “qualified overtime compensation.” As a result, employers must include the total amount of an employee’s qualified overtime compensation on their Form W-2.
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Qualified overtime compensation includes only the required overtime compensation that an employer must pay an employee under federal law. Under the Fair Labor Standards Act (FLSA), most non-exempt employees are entitled to receive overtime compensation at a rate of one-and-one-half times their regular rate of pay when they work more than 40 hours in a single workweek. Only the overtime premium (the “half” portion of “time-and-a-half”) qualifies for the deduction.
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Overtime compensation paid for other reasons, such as under a collective bargaining agreement or pursuant to state law, does not qualify for the deduction. For example, premium pay on weekends and holiday pay does not qualify.
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For tax year 2025, employers are not required to report qualified overtime compensation separately on Forms W-2. The IRS is considering tax year 2025 a transition period for purposes of IRS enforcement of the new overtime reporting requirements and has granted employers penalty relief for that tax year only. For tax years 2026 and beyond, employers must separately report qualified overtime compensation. Form W-2 will be updated for this purpose.
As you may have gathered, “no tax on overtime” is not as simple as it sounds. If you have questions about how the new reporting requirements affect your business, please contact any K|W|W attorney.
