OBBB
IRS Issues FAQs on Qualified Overtime Deduction
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APPLIES TO All Employers |
EFFECTIVE JAN 23, 2026 |
QUESTIONS? Contact HR On-Call |
Quick Look
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Discussion
Discussion
The IRS has released a new set of Frequently Asked Questions (FAQs) addressing the implementation of the qualified overtime deduction created under the One, Big, Beautiful Bill Act (OBBB). Although the deduction is available to employees on their individual tax returns, several of the FAQs contain important information for employers. Key aspects are summarized below.
- Definition of Qualified Overtime Compensation. The FAQs clarify how overtime compensation qualifies for the deduction, explaining that “qualified overtime compensation” is the portion of overtime required under Section 7 of the Fair Labor Standards Act (FLSA) that exceeds an employee’s regular rate of pay. For example, if an employee receives time‑and‑a‑half for an hour of overtime, only the “half‑time” premium represents qualified overtime compensation. Importantly, only overtime required by the FLSA can be considered “qualified overtime” compensation. If an employer pays above the FLSA minimum (for example, double time), only the amount needed to satisfy the FLSA requirement counts toward the deduction.
- Reporting Clarification. The IRS confirms that for tax year 2025, employers are not required to separately report qualified overtime compensation on Forms W‑2, 1099‑NEC, or 1099‑MISC. Employers may voluntarily provide separate reporting using Form W‑2 box 14, an online portal, or a separate statement. That said, the FAQs indicate that, beginning in tax year 2026, employer reporting becomes mandatory. Forms W‑2, 1099‑NEC, and 1099‑MISC will be updated to include designated fields for qualified overtime compensation. Employers should monitor IRS updates and ensure payroll systems are configured appropriately for the 2026 reporting year.
The FAQs also highlight that employees who qualify for the deduction but do not receive separate reporting for tax year 2025 may need to determine their own amount of qualified overtime compensation using IRS instructions or payroll records. Employers may therefore see an increase in employee inquiries related to overtime calculations, which they should be ready to address. Although employers are not obligated to calculate the deduction for employees, payroll departments may need to assist employees in locating or interpreting payroll data.
Action Items
- Update payroll practices and platforms for appropriate tracking and reporting of qualified overtime for tax year 2026.
- Prepare for employee questions regarding qualified overtime calculations.
- Monitor additional guidance from the IRS and Treasury Department.
Disclaimer: This document is designed to provide general information and guidance concerning employment-related issues. It is presented with the understanding that ManagEase is not engaged in rendering any legal opinions. If a legal opinion is needed, please contact the services of your own legal adviser. © 2026 ManagEase