By Mitch Reitman, Reitman Consulting Group
The One, Big, Beautiful Bill Act (OBBBA) created a new, temporary deduction for employees’ “qualified overtime compensation” for tax years 2025–2028. While this affects employees’ taxable income, the core employer withholding mechanics for overtime remain largely unchanged: overtime pay is wages and subject to income tax withholding, Social Security, and Medicare.
What did change for employers are reporting obligations and coordination with Form W‑4 processes. Here’s what you need to know.
Overtime is still considered reportable wages on W-2s; withholding and FICA still apply
Overtime pay is treated as wages for federal income tax withholding purposes. As an employer, you should treat overtime as regular wages rather than supplemental wages. The regulations of the bill explicitly allow this treatment, which simplifies withholding for many payrolls .
If you do classify overtime as supplemental wages, the regulation provides methods (aggregate or optional flat rate if conditions are met) to compute withholding. Regardless of classification, overtime pay is also subject to Social Security and Medicare (FICA) taxes like other wages.
OBBBA also added a specific W‑2 reporting line in which employers must include “the total amount of qualified overtime compensation” on the annual statement furnished to employees and in copies filed with SSA (Form W‑2) .
For payors outside of traditional employment contexts, OBBBA also expanded information return rules under section 6041 to require a separate accounting of qualified overtime payments on filed returns and furnished statements.
Because forms are catching up to the new requirements, the IRS granted penalty relief for the taxable year 2025. If you fail to separately report qualified overtime amounts on required returns/statements for 2025, penalties under sections 6721/6722 won’t be imposed as long as you otherwise provide complete and correct returns (including the total wage amounts).
Employers should still prepare to implement new W‑2 reporting for 2026 and beyond.
What should you do?
Continue withholding income tax and FICA on overtime as you do for regular hours.
Be ready to capture and report the FLSA overtime premium portion (the “qualified overtime compensation”) for W‑2 purposes starting with 2026 returns.
Check in with your tax professional for any changes to the Regulations or guidance from the IRS.
Mitch Reitman is the Managing Principal of Reitman Consulting Group. He is a Member of the Electronic Security Hall of Fame and can be reached at Mreitman@Reitman.US.
Frequently Asked Questions (FAQ)
1.Does the One Big Beautiful Bill Act eliminate overtime tax withholding?
No. Overtime remains fully subject to federal income tax withholding, Social Security, and Medicare taxes. The Act creates a temporary employee deduction but does not eliminate employer withholding requirements.
2.What is “qualified overtime compensation”?
Qualified overtime compensation generally refers to the FLSA-required premium portion of overtime pay — typically the additional half-time premium paid for hours worked over 40 in a workweek.
3.Do employers need to change how they calculate overtime?
No changes are required to overtime calculation rules under the Fair Labor Standards Act (FLSA). The change relates to tax reporting and employee deductions, not wage calculation.
4.When does the new W-2 reporting requirement begin?
Separate reporting is required beginning with 2026 Forms W-2. The IRS has provided penalty relief for 2025 transitional reporting.
Is overtime exempt from FICA under OBBBA?
No. Overtime wages remain subject to Social Security and Medicare taxes.
5.Should payroll systems be updated now?
Yes. Employers should work with payroll providers to ensure systems can separately track and report qualified overtime compensation for 2026 filings.