My employees asked about the new overtime tax deduction. What am I supposed to do as the employer?
Under the 2025 law, employees may deduct a capped amount of qualifying overtime pay on their personal tax returns through 2028. The specifics of the deduction belong to each employee and their tax preparer. As the employer, your job is tracking and reporting.
Starting with 2026 W-2 forms, employers must report qualifying overtime pay so employees have the information they need to claim the deduction. Overtime records now matter for tax reporting, not just wage compliance under the Fair Labor Standards Act.
If you run payroll in-house, make sure your system separates overtime hours and pay clearly enough to support this new reporting. Most payroll platforms are updating to handle the requirement, but the data has to be entered correctly along the way. If your overtime tracking has been informal, now is the time to tighten it up before the 2026 reporting year.
ClearLedgers® offers full-service payroll that builds this tracking in from the start. Overtime pay is captured each pay period and flows through to year-end W-2 preparation. For businesses that run their own payroll through ADP, Gusto, QuickBooks, or similar platforms, ClearLedgers also offers Payroll Oversight that includes reviewing overtime data and records for accuracy.
When your employees ask how the deduction works or how much they can claim, direct them to their tax preparer. That is a personal tax question. Your job is to provide accurate overtime information on their W-2.
Because this law is recent, confirm current rules, caps, and reporting requirements with the IRS or your tax professional before W-2 season. ClearLedgers does not prepare tax returns or give tax advice, but we do handle the small business bookkeeping and payroll that keep your overtime records clean for both compliance and reporting.
If you have questions about how your payroll setup handles overtime tracking, book a consultation and we can walk through it together.
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