The One Big Beautiful Bill Act (OBBBA) introduces several significant changes for employers, including new federal income tax deductions for qualified overtime wages, effective for tax years 2025 through 2028. Some of these provisions are retroactively effective as of January 1, 2025, impacting payroll processes and tax reporting. The OBBBA builds upon and modifies elements of the 2017 Tax Cuts and Jobs Act (TCJA), many of which were set to expire at the end of 2025.
Important Considerations
While these deductions offer potential tax savings, there are two important considerations:
- Detailed qualifications: The deductions come with specific eligibility requirements.
- Delayed impact: The benefits will primarily be realized when filing annual tax returns rather than through immediate payroll adjustments.
Definition of Qualified Overtime
The OBBBA allows taxpayers to deduct qualified overtime wages, but not all overtime qualifies.
- Eligibility: Only overtime wages required under Section 7 of the Fair Labor Standards Act (FLSA) are considered “qualified overtime.”
- Exclusions: Overtime wages not mandated by the FLSA are excluded. Examples include:
- Collective bargaining agreements: Some agreements may require overtime that falls outside FLSA guidelines.
- Motor carrier exemption: Employees whose duties impact the safety of motor vehicles in interstate commerce (e.g., truck drivers) are exempt from FLSA overtime requirements.
- Voluntary overtime: Employers who pay overtime voluntarily, without legal obligation, cannot count these wages as qualified overtime.
Employer Obligations and Reporting Changes
To ensure compliance with the OBBBA, employers will need to adapt their payroll reporting processes:
Revised Form W-2
- Transition period: The IRS is expected to issue transitional guidance for 2025, with major changes anticipated for the 2026 tax year.
- New codes: Drafts of the revised Form W-2 for 2026 include new codes in Box 12 to report:
- Qualified overtime wages.
- Contributions to Trump Accounts (a new savings vehicle introduced by the OBBBA).
As the IRS releases further guidance, employers should prepare to update their payroll systems and reporting processes to comply with the OBBBA’s provisions.
Contact your RKL advisor today to discuss how the OBBBA’s provisions on overtime wages may affect your business.
