As we wrote on July 14, 2025, the One Big Beautiful Bill Act (OBBA) contains a provision providing a tax deduction for employees’ overtime income in 2025 through 2028.
Originally, the data regarding such overtime income was to be reported on a W-2 form. However, as employers are preparing their 2025 W-2 forms (to be issued in January 2026), the IRS has provided some relief. Employers now may — but are not required to — include the qualifying overtime in the employee’s W-2 form. If an employer chooses not to include the deductible overtime on the W-2 form, the employer still has obligations and must provide the employee with detail on any overtime that is potentially deductible in some form. This detail can be in a memo to the employee explaining what overtime the employee earned that is eligible for the deduction. Starting next year, employers will have to report overtime on a W-2 form, as the IRS plans to update the form for employers to include such information.
Given these circumstances, employers need to understand what overtime payments are potentially deductible for employees. To that end, the only overtime that is eligible for a deduction is overtime that is required under the Fair Labor Standards Act. As a consequence, any overtime earned by an employee under any state law (that would not be required under federal law) is not eligible for the deduction and should not be reported as qualifying overtime either on the W-2 or in the 2025 report to an employee about...
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