The Internal Revenue Service will provide guidance and transition relief for tax year 2025 for employers subject to new reporting requirements and taxpayers claiming the deduction for overtime pay. The new deduction and W-2 reporting requirements do apply to the 2025 tax year. 

Employers should continue to withhold federal taxes from all overtime pay as this new provision is a tax deduction that taxpayers may claim when they file their taxes and applies after the standard deduction.  

The deduction, and new employer reporting requirements for 2025 W-2s, will apply to the portion of overtime that exceeds an employee’s regular rate of pay that is required by the Fair Labor Standards Act (FLSA). This is the “half” portion of the “time-and-a half” compensation required by the FLSA. The FLSA requires overtime at time-and-a-half rates to be paid to employees who actually work more than 40 hours a week and who are not exempt from these requirements due to job duties and salary tests. This deduction is phased out as income increases and not available after $160,000. 

This does mean that if your township has a more generous overtime policy than required by the FLSA, such as for working more than 8 hours a day or for working on weekends or holidays, record-keeping should differentiate between the required overtime and more generous policies in anticipation of year-end reporting. To learn more about the new overtime tax deduction and other new tax deductions from the One Big Beautiful Bill Act, click here.