Overtime Wage Reporting Updates: Employer Guidance

Recent federal and state law changes affect how overtime wages are treated for income tax purposes. This post provides a high-level overview for employers and explains how to communicate these changes to employees.

1) Federal Overtime Deduction (Effective 2025–2028)

Beginning in tax year 2025, federal law allows eligible employees to claim a federal income tax deduction related to overtime compensation.

Key points for employers

• The deduction applies to the overtime premium portion required under the Fair Labor Standards Act (FLSA) (generally the “extra” portion above the employee’s regular rate).
• The deduction is claimed by the employee on their federal tax return.
• This change:
  – Does not alter overtime pay calculations,
  – Does not change wage-and-hour compliance rules, and
  – Does not eliminate payroll taxes (Social Security and Medicare still apply).

Employer reporting

• Employers and payroll providers are required to track and report qualifying overtime information.
• The IRS has provided transition relief for 2025 since many payroll systems are not yet setup to report the deductible overtime premium on Form W-2.

2) Alabama Overtime Exemption (Ended June 30, 2025)

• Alabama previously exempted certain overtime wages from Alabama income tax.
• This exemption ended June 30, 2025.
• Qualifying Alabama overtime earned before that date should be reported on Form W-2, Box 14 and labeled “EX OT WAGES.”

3) Recommended Employer Action Steps

We recommend employers take the following steps:

1. Coordinate with your payroll provider
– Confirm how overtime premiums are tracked and summarized for 2025 and later years.

2. Distribute a Statement to Employees Regarding their Overtime Compensation
– We have provided a fillable Employer Statement here to assist you with this reporting.

3. Avoid providing individualized tax advice
– Encourage employees to consult their personal tax advisor regarding eligibility and benefit amounts.

Please contact us if you would like help implementing these steps or have questions about how these changes affect your business.