The new federal overtime deduction – adopted midyear but effective for qualified overtime earned beginning January 1, 2025 – has created reporting challenges for tax practitioners. And after the IRS announced transition relief, some practitioners are wary of reporting 2025 overtime on employees’ Forms W-2.
Overtime Deduction Basics
Effective for tax years beginning after December 31, 2024, the One Big Beautiful Bill Act (OBBB) created a temporary deduction under IRC § 225 for certain employees who receive qualified overtime compensation. The deduction is available through 2028.
Mary Hevener, a partner at Morgan Lewis, stressed that the deduction can only be claimed for the premium portion (the “half” in “time-and-a-half”) of overtime pay required under the Fair Labor Standards Act (FLSA).
Hevener, speaking at the Philadelphia Tax Conference on November 11, explained that the new deduction is not available for overtime required solely under a state law, employer policy, or collective bargaining agreement. For example, it excludes overtime pay beyond the “half,” such as when a company pays double for overtime. It also excludes additional holiday pay or overtime calculated on a daily, rather than weekly, basis. And some industries also are not covered, such as those subject to the Railway Labor Act.
Beyond that, Hevener explained that even qualified overtime is subject to limits under § 225 – namely, taxpayers may only claim a deduction of up to $12,500 ($25,000 for married-filing-jointly), and the deduction phases out for those at over $150,000 modified adjusted gross income ($300,000 for married-filing-jointly).
The amount of overtime eligible for the new deduction is “real small,” said Hevener. “I do not think that very many people are really, really qualified to claim this deduction,” she added.
Reporting Challenges Persist, Despite Transition Relief
Under § 225, the deduction is contingent on the qualified overtime amount being included on a payee statement, such as a Form W-2. However, calculating the correct amount will be challenging, particularly for 2025.
Tim Wilkinson, a tax director at Carpenter Technology, noted that it’s not just “straight overtime” that qualifies for the deduction. Consequentially, employers need to make changes on the “back end” to “track everything and aggregate it properly.”
“It’s starting to be a little bit more of a challenge than you would initially expect,” said Wilkinson, speaking on a panel of company tax directors during the Philadelphia Tax Conference.
Not only that, but the IRS will not be updating the Form W-2 for 2025 to accommodate overtime reporting.
In response to these concerns, on November 5, the IRS announced overtime reporting transition relief via Notice 2025-62. The notice provides that the IRS will not impose penalties under IRC § 6721 or IRC § 6722 if employers fail to separately report qualified overtime compensation on 2025 Forms W-2 or other required information returns.
The IRS, however, is encouraging employers to provide overtime information to employees so they can determine if they are eligible to claim the deduction. The agency suggests providing the information through an online portal, an additional written statement, or in Box 14 of the employee’s Form W-2.
Employer Reporting Options for 2025
Despite the IRS’ encouragement, Hevener strongly advises against reporting the qualified overtime amount on employees’ Forms W-2 for 2025. She warned of litigation risks associated with providing an incorrect amount. Specifically, she pointed to IRC § 7434, which allows employees to bring civil action for fraudulent filing of an information return, with damages of $5,000 per employee.
Hevener contends that courts have interpreted “fraudulent” broadly. A deliberately filed return that contains wrong information could be considered fraudulent, even without malicious intent, she added. “Doing nothing doesn’t get a penalty, but doing it wrong can attract a penalty,” Hevener said. Given the risks for incorrect calculations, she advised employers not to report an overtime figure on Form W-2 for 2025.
Educating employees on the deduction and warning them about what they can actually take is “fine,” said Hevener. However, “don’t put any number in Box 14 of the W-2 this year,” she urged. “You’re not doing employees any favor, and you’re exposing yourself to these potential penalties.”
Wilkinson offered a more moderate approach. For Carpenter Technology, “the plan is more to offer a letter, like a supplemental disclosure to the W-2, but not touch the W-2 right now,” he said. This strategy educates employees without certifying a specific number on an official tax form. He noted that Carpenter Technology employees are already asking about the new deduction.
Wilkinson does not plan on using Box 14 for 2025 reporting, despite it being mentioned as an option in the IRS transition guidance. His concern is more procedural though. “Even if you want to use Box 14 … can your payroll company accommodate that with a proper code?” he asked.
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