7/23/25 Overtime Reporting Responsibilities – No Tax or Tax Deduction?

July 23, 2025

By Jeff Robertson  &  Iris Tilley

One of the most impactful and confusing effects of the recent Tax Bill (so called “One Big Beautiful Bill Act”) is the concept of no tax on overtime. While we have limited guidance, it is important for employers to understand and properly respond to the new law.

Not a Tax Exemption – A Tax Deduction for the Individual

Under the new law, overtime compensation is not exempt from tax the way a deferred 401(k) contribution might be. Rather, the dollars are a possible deduction taken by the employee on their 1040 tax return. Employers should not change their own tax reporting on this compensation. Many employees are already asking employers to eliminate payroll and income tax deductions from their overtime pay.

Only FLSA Overtime is Covered

Not all overtime is covered by the Federal Labor Standards Act (“FLSA”), and only overtime covered by the FLSA is subject to the tax exemption and ultimately the reporting requirements of the employer. This is particularly notable for wages covered by a collective bargaining agreement, and employers should be reviewing their labor contracts to ensure any reporting of overtime subject to the deduction is valid FLSA overtime.

Method of Calculation

While an employee sees “overtime” wages as all wages earned after the normal workday/workweek, the Tax Bill only exempts dollars paid above the regular wage. The example in the guidance provides that a “time and a half” wage payment as overtime is only deductible by the employee for the “half” and not the regular wage portion.

Reporting May be Delayed Until 2026 but the Deduction Begins Now

Employers appear to be provided a grace period on reporting by the Internal Revenue Service until 2026, but employees will be able to claim the deduction beginning when they file their 2025 tax returns. This may result in questions to the employer about the total qualifying overtime wages and even if not reporting on the 2025 Form W-2, the employer should be prepared to assist employees with answering these questions.

Please contact Jeff Robertson at 503-276-2140 or jrobertson@barran.com, Iris Tilley at 503-276-2155 or itilley@barran.com, or your regular attorney at Barran Liebman if you have any questions.