New Overtime Tracking & Reporting Requirements for Employers
New Overtime Tracking & Reporting Requirements for Employers
You have undoubtedly heard about the federal One Big Beautiful Bill Act (“OBBBA”). One of the OBBBA provisions is the “No Tax on Overtime” (Sec. 70202) terms, which are effective for tax years 2025 through 2028.
The OBBBA“No Tax on Overtime” actually provides that individuals can deduct the tax on overtime as calculated by the federal Fair Labor Standards Act (“FLSA”). The FLSA overtime requirement kicks in when an employee works more than 40 hours in a week, however, in California, the overtime rules (OT) are more stringent (e.g. OT after 8 hours/day, etc.). So, employers now must figure out how to track and inform employees of the federal sums for OT.
Employees will want from employers additional information in order to ensure they are not paying the tax subject to the OBBBA deduction. Which employees will want it? Employees who receive FLSA (weekly) overtime pay reported on Form W-2, 1099 or other applicable form, which means employers must report FLSA separate from CA OT. And, notably, the OBBBA allows employees to deduct up to $12,500 annually ($25,000 for joint filers) for FLSA OT, on their return, which amount phases out when the individual taxpayer’s adjusted gross income exceeds $150,000 (or $300,000 if filing jointly).
Employers should promptly:
1. Review Payroll Systems: Separate tracking of the FLSA (weekly) OT (“premium”) portion of overtime compensation to ensure that only state tax withholding is applied to FLSA overtime. If you use a payroll company, ensure that company updates their systems.
2. Update Policies and Procedures: Review and update overtime calculations and payroll practices to ensure compliance with the OBBBA.
3. Train: Managers, HR, and payroll teams ought not to give out tax advice to employee but should be trained to explain what the company will report and direct employees to their own tax professionals for personal guidance.
We expect the IRS will provide further technical reporting instructions and additional further guidance on these issues.
In the meantime, the OBBBA allows time for getting this down pat and employers can do approximation for the tax year 2025. What that means and when approximations must be clarified for the IRS is unclear. So, employers should work quickly with their payroll providers and tax advisors to reasonably account for 2025 so far and to update their systems and procedures going forward. Proactive planning now will help employers avoid reporting errors and potential penalties when the first filings are due, and to address overtime already taxed earlier in 2025.
We are here to help you plan and grow and protect your business. Please feel free to contact Dawn at: dcoulson@eppscoulson.com.
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