FLSA Overtime Reporting and Withholding

The One Big Beautiful Bill Act (the Act), signed on July 4, 2025, allows a deduction from an individual’s personal tax return on Form 1040 for “qualified overtime compensation” as defined in new Code § 225. The amount that can be deducted from the employee’s return is capped at $12,500 with the maximum then adjusted down if the employee’s AGI exceeds certain limits. This deduction is permitted in 2025.

Qualified Overtime Compensation

The term “qualified overtime compensation” (QOC) is defined under Code § 225 to include only the overtime paid as required under § 7 of the Fair Labor Standards Act (FLSA) in excess of the employee’s “regular rate” (as defined in the FLSA); that is, QOC encompasses only the overtime premium over the employee’s regular rate. (For example, a regular rate of $20 per hour yields on overtime payment of $30 per hour, which consists of the regular rate plus a $10 overtime premium.)  And the definition’s focus on the amount required under FLSA means that the term would not include overtime premiums required only under state law or under an employer’s policy that is not otherwise required under FLSA. For example, amounts paid to an exempt employee or amounts required under state law because an employee worked more than eight hours in a day (as opposed to the FLSA standard of 40 hours per week) would not constitute QOC.

Confusion for Employers in 2025

The Act amends Code § 6051 to provide that a Form W-2 issued by the employer to the employee should include a description of the QOC paid to the employee during the year. An employee would have difficulty determining the amount of the deduction without this information. The statute requires an employer to provide the information for the 2025 tax year by January 31, 2026. To meet this requirement, the employer will need to determine how to calculate the QOC and how to report it.

Calculating QOC

The Act provides a transition rule for 2025 whereby an employer may approximate a separate accounting of QOC by any “reasonable method specified by the Treasury.” On August 7, 2025, the IRS updated its website to include a statement that it is working on new guidance to be provided “in the coming months,” which, we assume, will provide such reasonable calculation methods. Although we would hope the guidance would allow employers significant discretion in making this determination, there are a few issues an employer should bear in mind:

• The FLSA definition of “regular rate” does not always equal the employee’s “hourly rate.” Rather, the regular rate under the FLSA would include shift differentials, non-discretionary bonuses, and certain other forms of compensation.
• Employers are often required to true up the amount of overtime payments to reflect end-of-period bonuses or other adjustments that retroactively increase an employee’s regular rate, as described above.

Reporting QOC

As of now, it is not clear how an employer should report QOC. On August 7, 2025, the IRS stated on its website that it will not modify Form W-2 for 2025. However, as noted above, the employer remains obligated under Code § 6051 to report the QOC information employees for 2025.

Absent any guidance directing the use of another box or code on Form W-2, an employer may reasonably assume that including QOC on Form W-2, box 14 would satisfy Code § 6051(a)(19) for 2025. Code § 6051 requires an employer to provide a statement to an employee reflecting certain items, including the QOC paid during the year. Treasury Regulation § 31.6051-1(a) provides that the statement shall be on Form W-2. Neither Code § 6051 nor the regulations describe that any information should be provided in any special box or using any special code; rather, such detail is described in the form’s instructions. As it relates to the Form W-2, box 14 is titled “Other” and the instructions provide that “You may also use this box for any other information that you want to give your employee,” provided that the information is labeled. Thus, an employer can reasonably assume that including the QOC information in box 14 of Form W-2 should meet the requirements under Code § 6051 and is not inconsistent with the Form W-2 instructions.

We expect that the IRS will provide further informal guidance regarding the use of Form W-2 for 2025, in its current form, to meet the new QOC requirements under the Act.

For 2026-2028, the IRS has stated that they will issue an updated Form W-2 and instructions. On August 15, 2025, the IRS released a draft 2026 Form W-2 that would require QOC to be reported in box 12 and using the code TT. Absent changes to Form W-2 for 2025, it would seem that using box 12 for QOC in 2025 could lead to confusion for an employee as there is neither a corresponding code in the instructions nor a mechanism to tell an employee what is reflected in box 12.