Since our original post detailing the tracking and reporting requirements imposed by the One Big Beautiful Bill Act (“OBBBA”) for federal tax deduction of qualified overtime compensation (i.e., Fair Labor Standards Act (FLSA) overtime), the IRS has announced significant guidance for 2025 reporting. For Tax Year 2025, Employers Are Not Required to Separately Report Qualified... Continue Reading…
Since our original post detailing the tracking and reporting requirements imposed by the One Big Beautiful Bill Act (“OBBBA”) for federal tax deduction of qualified overtime compensation (i.e., Fair Labor Standards Act (FLSA) overtime), the IRS has announced significant guidance for 2025 reporting.
For Tax Year 2025, Employers Are Not Required to Separately Report Qualified Overtime Compensation Due to Penalty Relief from the IRS.
On November 5, 2025, the Department of the Treasury and the Internal Revenue Service (IRS) issued Notice 2025‑62 (see IR-2025-110) providing penalty relief for the 2025 tax year with respect to certain new information-reporting obligations under the OBBBA.
Employers will not face penalties under the Internal Revenue Code (IRC) section 6721 for failure to file correct information returns, or under IRC section 6722 for failure to furnish correct payee statements, if the employer does not separately report the total amount of qualified overtime compensation in tax year 2025. The relief is strictly limited to the 2025 tax year.
Greater Flexibility Applies for Employers Who Voluntarily Report in 2025.
Although not mandatory in 2025, the IRS encourages employers to provide the separate accounting of qualified overtime to employees this year. However, employers who voluntarily provide the separate overtime accounting in 2025 have greater flexibility than they will in 2026 and will not face penalties for the method used to calculate qualified overtime compensation. Regardless, the method used should be reasonable and consistent and comply with general recordkeeping and accuracy principles. The delay in reporting requirements reflects the IRS’s acknowledgement that many employers do not yet have the systems or information necessary to comply with the new reporting rules for 2025, as well as the fact that the W-2 form for the 2025 tax year will not be updated to accommodate the OBBBA changes.
Absent Employer Reporting, Individual Employees Can Calculate and Claim a Deduction for Qualified Overtime Pay in 2025.
On November 21, 2025, the IRS issued Notice 2025-69, providing guidance to individual taxpayers on how to claim the new qualified overtime compensation deduction for tax year 2025.
Because employers are not required to report qualified overtime compensation on W-2’s in 2025, Notice 2025-69 provides guidance and examples for how individual taxpayers can report and substantiate overtime deductions in the absence of formal reporting from employers. Individuals who are not furnished a separate accounting of qualified overtime compensation in box 14 of Form W-2 (or on a separate statement) must make a reasonable effort to determine whether they are considered overtime-eligible under the FLSA, which may include asking their employers about their status.
Individuals may use any of the following reasonable methods for purposes of determining the amount of qualified overtime compensation under section 225(c) for tax year 2025:
- If the individual’s pay statement for 2025 shows the FLSA overtime premium separately, meaning it lists the extra “half-time” portion for working more than 40 hours in the seven-day work period (or other appropriate work period length and hours threshold), then the individual can report that amount as qualified overtime compensation.
- If the individual’s pay statement does not show the FLSA overtime premium separately, but it does show a combined number for all FLSA overtime pay (regular wages for overtime hours + premium wages), then the individual may report one-third of that combined amount as qualified overtime compensation.
Notice 2025-69 allows use of a similar fractional method to determine the reportable amount if double time overtime applies for hours worked in excess of 40 hours in a workweek (or other appropriate work period length and hours threshold). It also allows the individual to adjust the calculation if the fractional method would undercount the true overtime premium (for example, because the individual’s base rate increased due to a nondiscretionary bonus).
- If the individual does not receive any statement showing the overtime premium, the total overtime pay, or the total premium above regular pay, the individual can use any reasonable method to estimate the regular rate of pay, and the number of hours worked above 40 per week or above the hour’s threshold for the applicable work period. A reasonable method includes requesting information from the individual’s employer and using the information provided by the employer for purposes of calculating the deduction.
- If an individual is covered by different overtime rules under the FLSA compared to most 40-hour employees (such as firefighters, police, certain hospital workers), the individual must calculate overtime based on those specific rules but may still use any reasonable method described in this notice.
FLSA Compensatory Time Off is Reportable as Qualified Overtime Pay.
Until now, it has been unclear whether FLSA overtime earned as compensatory time off is reportable as qualified overtime compensation under the OBBBA. Notice 2025-69 affirmatively states that an individual who works for a state or local government agency that gives compensatory time at a rate of one and one-half hours for each FLSA overtime hour worked may include one-third of those wages for purposes of determining qualified overtime compensation.
Individual employees receiving compensatory time off may take the overtime amount into account for reporting purposes only in the year the compensatory time is paid due to the employee cashing it out or using the paid time off.
Where FLSA and Non-FLSA Overtime Are Reported as a Combined Amount, Individuals Can Use Earning Statements to Approximate Reportable FLSA Overtime.
Where employers combine FLSA and non-FLSA overtime on earnings statements, Notice 2025-69 states that individuals can use the statements to approximate the amounts of FLSA overtime.
In all cases, individuals must maintain copies of any documents they rely on in accordance with IRS recordkeeping requirements and should also maintain records of the basis for any approximation.
The Deduction is Capped and Phases Out at a Modified AGI Over $150,000.
The deduction is capped at $12,500 per individual (or $25,000 for married joint filers). The deduction phases out at a Modified Adjusted Gross Income threshold over $150,000 (or $300,000 for joint filers).
Conclusion
While the importance of tracking and reporting qualified overtime compensation under the OBBBA will remain, the IRS’s Notice 2025-62 provides transitional relief for tax year 2025.
Employers should view this as an opportunity to prepare, refine systems and educate stakeholders — but not as a reason to defer the work entirely. Beginning early will smooth the transition into the full enforcement years. We recommend the following employer guidelines:
- Continue to plan for the separate tracking of qualified overtime compensation (i.e., the portion of FLSA-mandated overtime that is eligible under the OBBBA). As discussed in our original post, the OBBBA’s deduction for qualified overtime requires a separate accounting of overtime that is FLSA-mandated and the value of “half-time” premium.
- Use the 2025 year as a transition year. The IRS is giving employers breathing room regarding the new breakdown reporting in tax year 2025. Failure to accurately report will not trigger penalties, provided other reporting obligations are met.
- Keep documentation of the reasonable method used. Even though the IRS is not imposing penalties for failure to separately account in 2025, employers should still document the method used to approximate or identify qualified overtime compensation.
- Communicate to employees. For the 2025 tax year, employers are encouraged to provide separate statements for employees showing their separately reported qualified overtime compensation, so that the employee may easily claim the deductions when filing. Early communication may reduce confusion.
- Prepare for 2026 and onwards. The relief applies only for 2025. Employers should accelerate system updates ahead of the 2026 reporting year, when the IRS will enforce the breakdown of qualified overtime.[1]
Should you or your agency need assistance evaluating your payroll practices, updating tracking systems, or communicating to employees regarding the eligible overtime deduction and reporting obligations, please reach out to your trusted legal advisors.
[1] As of now, the overtime deduction established by the OBBBA is in effect for tax years 2025 through 2028.
