The IRS announced that, for tax year 2025, employers will not face penalties for failing to separately report qualified overtime compensation. The One, Big, Beautiful Bill Act (OBBBA) specifically allows eligible employees to deduct a certain amount of qualifying overtime pay from their federal taxable income for 2025-2028 tax years. This transition relief applies only for 2025, as Forms W-2 and 1099 will not be updated to reflect the new overtime reporting requirements until later years. Employers may still choose to provide separate overtime details to help employees claim new deductions, but it is not mandatory for 2025. Most non-exempt, hourly workers are eligible for the deduction. Industries mentioned as potential beneficiaries in preliminary guidance include construction.
The Department of the Treasury and the IRS last week provided additional guidance for workers eligible to claim the deduction for tax year 2025. The new guidance clarifies for workers how to determine the amount of their deduction without receiving a separate accounting from their employer. It also specifies who is exempt and provides specific practical examples illustrating situations that workers who receive qualified overtime might encounter.