As the year winds down, it’s important for employers to prepare for the new qualified overtime reporting rules that apply for 2025. Beginning this year, employers are required to report any “qualified overtime” pay to employees so that those employees can take advantage of a new federal tax deduction when filing their personal tax returns.

This amount may be reported either in Box 14 of the employee’s W-2 or by providing a simple written statement directly to the employee. Whichever method you choose, this reporting must be provided to employees no later than January 31, 2026.

You may have heard (incorrectly) that reporting isn’t mandatory this year. In reality, the IRS has only stated they will not penalize employers for failing to report or incorrectly reporting the amount. But make no mistake, employees will be actively looking for this information to complete their taxes, and employers that fail to provide it are likely to face pushback and frustration from their teams.

What Is “Qualified Overtime”?

Qualified overtime refers specifically to the premium amount paid for hours worked over 40 in a week, not the entire overtime pay, just the additional amount above the standard hourly rate.

Example:
If Mary is paid $30/hour and earns time and a half for overtime, then her overtime rate is $45/hour. The $15/hour premium is what qualifies as “qualified overtime”.

Here’s How It Breaks Down:

Let’s say Mary works 50 hours in one week. Her pay would look like this:

40 hours @ $30/hour = $1,200
10 hours overtime at standard rate of $30/hour = $300
10 hours overtime premium addition of $15 = $150
Total pay: $1,650

In this case, the qualified overtime amount is $150 and this is the amount that must be reported to Mary by the employer, either in Box 14 of her W-2 or in a separate written statement.

What If You Didn’t Track Overtime in 2025?

Employers who didn’t specifically track qualifying overtime throughout the year may use a reasonable estimate to determine the reportable amount. However, to qualify:

• Overtime must have been paid at least at time and a half

• Only the premium portion qualifies for reporting

Payroll Providers and Year-End Planning

If you’re using a payroll service and would like the qualified overtime amount included in your W-2s, be sure to provide this information for each employee before your final 2025 payroll run. Otherwise, you’ll be responsible for preparing and issuing a separate year-end statement to each affected employee.

Don’t Wait, Get Ahead of the Deadline

Employee questions and expectations will rise quickly after year-end. Proactively calculating and preparing this report now can prevent confusion, delays, and stress in January.

As always, we’re happy to answer your questions or help you determine how best to report qualified overtime for your team.