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.
Relationship-First Bookkeeping for Small Businesses
The Next Step:
A Short Conversation
Tell us about your business and what you're dealing with. We'll listen, answer your questions, and explain how ClearLedgers can help.
More Questions
Which of my products are actually making me money after all the fees?
You won't know until your books capture fees as real costs instead of letting them disappear inside net deposits. True product profitability means revenue minus product cost, platform fees, payment processing fees, shipping, and returns. Many sellers discover their bestsellers actually lose money once all costs are visible.
Read answerWhy should I collect a W-9 before I ever pay a contractor?
A W-9 gives you the taxpayer ID and legal name you need to file accurate 1099s. Without it on file, you may be required to backup-withhold 24 percent from payments. The time to collect it is before the first payment, when the contractor is engaged and motivated.
Read answerCan I put my spouse or my kids on payroll?
Yes, family payroll is legitimate when the work is real and pay is reasonable. Family members must be set up and processed through your payroll system just like any other employee.
Read answerThe books I inherited from my last bookkeeper are a mystery. Where do I start?
Start by gathering access and reviewing what exists, then reconcile every account to statements. This reveals what's real versus what's recorded wrong. From there, fix or rebuild the chart of accounts and document a clean baseline going forward.
Read answerMy POS or Shopify collects sales tax. Why do I still need someone managing it?
Your platform collects tax at checkout, but filing returns and remitting the money to each state is still your responsibility. Collected tax that never gets remitted is actually worse than not collecting at all.
Read answerWhat is the difference between your Full-Service Payroll and Payroll Oversight?
Full-Service Payroll means ClearLedgers processes your payroll entirely, from gross-to-net through tax filings and W-2s. Payroll Oversight means your platform runs payroll while ClearLedgers maps it to your books and handles onboarding, compliance, and year-end review. The choice depends on how hands-off you want to be.
Read answer
