No Tax on Overtime

New deduction: Effective for 2025 through 2028, individuals who receive qualified overtime compensation may deduct the pay that exceeds their regular rate of pay – such as the “half” portion of “time-and-a-half” compensation -- that is required by the Fair Labor Standards Act (FLSA) and that is reported on a Form W-2, Form 1099, or other specified statement furnished to the individual. This is not a payroll deduction, but a deduction claimed on the employee's personal federal income tax return.

• The maximum annual deduction is $12,500 ($25,000 for joint filers).

• Deduction phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers).

• Taxpayer eligibility: Deduction is available for both itemizing and non-itemizing taxpayers.

  • Taxpayers must:

    • Include their Social Security Number on the return

    • File jointly if married, to claim the deduction.

Reporting​

• Employers and other payers are required to file information returns with the IRS (or SSA) and furnish statements to taxpayers showing the total amount of qualified overtime compensation paid during the year. (https://www.irs.gov/newsroom/one-big-beautiful-bill-act-tax-deductions-for-working-americans-and-seniors )​

Guidance – Transition Relief for Tax Year 2025​

• The 2025 W-2 forms are not changing (https://www.irs.gov/newsroom/irs-announces-no-changes-to-individual-information-returns-or-withholding-tables-for-2025-under-the-one-big-beautiful-bill-act  )​

• The IRS is encouraging employers who can reasonably report the correct FLSA amount to include it in Box 14 or provide it to employees in some other fashion such as the check stub.  ​

• The IRS is offering penalty relief for 2025 as they understand that not all employers will be able to accurately calculate the amount (https://www.irs.gov/newsroom/treasury-irs-provide-penalty-relief-for-tax-year-2025-for-information-reporting-on-tips-and-overtime-under-the-one-big-beautiful-bill )​

• The IRS issued guidance for employees to clarify how to determine the amount of their deduction without receiving a separate accounting from their employer for cash tips or qualified overtime on 2025 information returns (https://www.irs.gov/newsroom/treasury-irs-provide-guidance-for-individuals-who-received-tips-or-overtime-during-tax-year-2025 )​

The federal overtime provisions are contained in the Fair Labor Standards Act (FLSA). Unless exempt, employees covered by the Act must receive overtime pay for hours worked over 40 in a workweek at a rate not less than time and one-half their regular rates of pay. There is no limit in the Act on the number of hours employees aged 16 and older may work in any work week. The FLSA does not require overtime pay for work on Saturdays, Sundays, holidays, or regular days of rest, unless overtime is worked on such days. Also, the requirements may vary for different employees. For specifics on how the act applies to your employees, check your FLSA guidelines. https://www.dol.gov/agencies/whd/overtime

Pay Code Set Up

Path: Human Resources > Reference Tables > Payroll > Pay Codes

A pay code must be set up specifically for FLSA overtime. The system uses this as the pay code for the timecards generated for overtime pay.

For the system to calculate and create a timecard for FLSA overtime pay, the following conditions must be met:

• General Tab

  • The pay code's Pay Type field must be set to H - Hourly,

  • You can leave the pay code Rate field set to 0.000, since the additional rate for overtime (0.5) is automatically used in calculations. Or you can put .50 if that helps you know what the rate is.

• Payroll tab-

  • The FLSA Overtime checkbox must be selected.

  • The FLSA Calculation Type field must be set to N – No

On the pay code(s) assigned to employees for Regular pay:

• General tab

  • Must have its Pay Type field set to H – Hourly.

Payroll tab

• FLSA Calculation Type field set to either A - Amount Only, H - Hours Only, or B - Both. We recommend that you select B - Both.

For Amount type Pay code(s) that are to be included in the FLSA calculation, the average rate should be set up as below.

• On the Payroll tab:

  • Pay Time Type is R – Regular Pay

  • FLSA Calculation Type is A - Amount Only

Employee Set Up

Path: Human Resources > Entry and Processing > Employee > Employee Information

Payroll Tab

• FLSA Cycles/Year = 52”

• The FLSA Cycle Hours field must contain the number of hours in an FLSA cycle. e.g. 40 hours per week

 Path: Human Resources > Entry and Processing > Employee > Employee Pay Rates

·      The Pay Method must be H-Hourly or S – Step/Range with an hourly rate.

·      The Pay Rate must be populated

Payroll Timecards

Path: Human Resources > Entry and Processing > Payroll > Import Batch Timecards

Review File Requirements here

In the Employee Time page's FLSA field, you must identify each FLSA cycle with a sequential integer, starting with 1. However, the same cycle can be used with different pay codes or different budget units within the same pay codes.

Sample file for monthly pay frequency: