Issues Arise for Employers Concerning the Overtime Tax Break

The new Administration’s tax law lets most workers deduct up to $12,500 of the “half” of the “time-and-a-half” of federal overtime income this year through 2028.  However, the benefit does not apply to Social Security and Medicare taxes.  Payroll systems will need to be programmed for 2026 to track the relevant income so that it can be reported.  The Internal Revenue Service (IRS) has stated employers may report qualified overtime for 2025 in Box 14 of the 2025 W-2.  

There is an issue whether employers separate the income eligible for the overtime deduction in tax forms they send employees.  Most employers want to accommodate their workers, but some companies fear some legal risk if they do this incorrectly.  The IRS has provided guidance to employees on how to calculate the deduction.  There is penalty relief available on the W-2 Form reporting for 2025, but only for that year.  The guidance indicates employers won’t face penalties for neglecting to separately provide the total amount of overtime compensation.  The hope is that the new information from the IRS will assist employers in calculating the overtime deduction properly, making the possibility for penalties less worrisome.  The IRS has not updated the W-2 Forms for the 2025 tax year to account for the overtime deduction, but employers can use a box for “Other” if they report their employees’ eligible compensation.  The recent guidance only applies to the 2025 tax year, and people are filling out their returns in 2026 for the 2025 tax year. 

This article is part of our January 2026 Newsletter. 

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