Background
The One Big Beautiful Bill Act (OB3) introduced Section 225 to the Internal Revenue Code (IRC), which allows individuals to deduct qualified overtime compensation from their taxable income for tax years 2025 through 2028.
What Is Qualified Overtime?
Section 225(c)(1) defines “qualified overtime compensation” as overtime compensation paid to an individual required under Section 7 of the Fair Labor Standards Act of 1938 (FLSA) that is in excess of the regular rate at which such individual is employed (the FLSA Overtime Premium). Specifically, the FLSA generally requires overtime to be paid at an additional one-half (1.5) times the employee’s regular rate of pay. For example, assume an employee is non-exempt under the FLSA and, therefore, is required to receive overtime compensation. If an employee’s regular rate of pay is $30 an hour, the FLSA will require payment of overtime at a rate of $45 an hour. The FLSA Overtime Premium, or $15, is the amount of qualified overtime paid per hour of overtime.
Overtime paid in amounts or situations not mandated by the FLSA does not constitute qualified overtime. This includes, for example, overtime paid at a higher rate than the FLSA requires for working on weekends or holidays, or pursuant to state or local law, company policy, or union contracts.
Insight from Forvis Mazars: Certain states and localities have special overtime requirements. California, for example, generally requires overtime pay in specified scenarios or at higher rates than required by the FLSA. Similarly, compliance with employer policy or union/collective bargaining agreements may result in payment of overtime that is not required by the FLSA. To comply with the employer reporting requirements, employers will need to determine which employees are “non-exempt” under the FLSA and required to receive overtime compensation, and how much of their total overtime paid for the year was required under the FLSA, irrespective of state law, policy, agreements, etc.
2025 Transition Guidance
Although employers are required to report qualified overtime on an employee’s Form W-2, the form was not revised for the 2025 tax year to reflect the changes and requirements for the overtime deduction. To address this, the IRS released two notices to provide 2025 transition guidance to taxpayers and employers/payors.
Notice 2025-62 provides penalty relief to employers for taxable year 2025, only in relation to the implementation of the new reporting obligations in connection with the deduction for qualified overtime that were added to the IRC by the OB3. Particularly, the notice gives relief from the penalty for failure to file correct information returns and for failure to furnish correct payee statements for taxable year 2025. While not required, the IRS recommended in the notice that employers could provide the amount of qualified overtime so that employees or payees can still determine whether they can claim the deduction for qualified overtime for tax year 2025 using Box 14 of Form W-2, additional written statements furnished to the employees, an online portal, or other secure methods.
Notice 2025-69 provides guidance and multiple methods for employees to determine the amount of qualified overtime they received in 2025. If the amount is provided by the employer under one of the methods provided for in Notice 2025-62, the employee will be able to rely on that information in computing their overtime deduction. There are various alternate methods that employees can use to determine their qualified overtime in addition to reliance on information provided by their employer under Notice 2025-62.
Insight from Forvis Mazars: Although Notice 2025-62 provides relief from the requirement for employers to furnish statements with a separate accounting of overtime to employees, the reasonable methodology provided to individuals in Notice 2025-69 is nevertheless largely conditioned upon the receipt of some form of information and/or assistance from an employer that communicates or helps an employee determine a reasonable approximation of an amount of FLSA overtime that the employee received. As such, and for 2025 only, employers should still consider determining and providing some reasonable approximation of an employee’s FLSA overtime for 2025.
In regard to how an employer should communicate overtime amounts, although Notice 2025-69 permits reliance on amounts provided in box 14 of Form W-2, to avoid unnecessary risk, it is generally not recommended for employers to report qualified overtime via box 14. Instead, employers should consider other methods, such as online portals or additional written statements supplied to the employees.
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