What the One Big Beautiful Bill Means for Employers and Payroll Teams: an Update
A follow-up to our original discussion on the One Big Beautiful Bill Act (OBBBA).
The IRS has begun releasing guidance on how this provision will be implemented, and we are closely monitoring each update to ensure payroll processes are adjusted appropriately and employers remain compliant. Be sure to check back on the Strongpay blog for the latest updates and insights.
One important note: employees will claim the overtime exemption as an above-the-line deduction on their personal tax returns. For 2025, this exemption will not be applied through payroll.
2025 Requirements
On August 7, 2025, the IRS confirmed that there will be no changes to federal income tax withholding tables or W-2 reporting requirements related to the overtime exemption for tax year 2025.
While the IRS has stated that W-2 reporting will not be modified for 2025, it is still unclear how employers will report qualified overtime to the IRS. The IRS has announced transition relief for tax year 2025, allowing employers to approximate amounts of qualified overtime and tips when reporting. This applies to both taxpayers and employers subject to the new reporting requirements.
As soon as the IRS provides further instructions, particularly on employer reporting requirements for 2025, we will update you on how these will be incorporated into payroll processing.
2026 and Beyond
The IRS has also confirmed that changes to the federal withholding tables and reporting mechanisms will begin in 2026, although detailed guidance is still pending. An early draft of the 2026 Form W-2 was just released, which includes a new requirement to report qualified overtime in Box 12 using code “TT”. This change is currently under review and will be implemented in the payroll system in time for the 2026 W2 reporting in January 2027.
Below is an overview of the “No Tax on Overtime” (OBBBA) provision: https://www.irs.gov/newsroom/one-big-beautiful-bill-act-of-2025-provisions:
Employee Claim Mechanism:
This is an above-the-line deduction—available even to non-itemizers—claimed when employees file their federal tax return.
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 reported on a Form W-2, Form 1099, or other specified statement furnished to the individual.
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).
Definition of Qualified Overtime Compensation
Overtime pay required under Section 7 of the Fair Labor Standards Act pay for hours worked over 40 in a workweek at a rate not less than time and one-half their regular rates of pay.
Only the amount in excess of the regular rate of pay is included in the exemption.
Important: Excludes tips
Taxpayer eligibility: Deduction is available for both itemizing and non-itemizing taxpayers.
Tax Types Affected: The deduction only applies to federal income tax. Social Security, Medicare, state and local taxes still apply to overtime pay.
Taxpayers must:
Include their Social Security number on the return and
File jointly if married, to claim the deduction.
Reporting: Employers and other payors 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. IRS is to release specific information on the reporting requirements.
Guidance: The IRS will provide transition relief for tax year 2025 for taxpayers claiming the deduction and for employers and other payors subject to the new reporting requirements.
To learn how Strongpay can help you navigate these updates with confidence, visit strongpay.com.