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2h ago

Payroll Overhaul Underway as Overtime and Tip Tax Deductions Approach

Regulators at Treasury working with IRS plan detailed rules for separate W-2 reporting of FLSA-defined overtime premiums versus other pay; Colorado’s state overtime tax regime remains at odds with federal exemptions.

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Overview

  • The One Big Beautiful Bill Act allows above-the-line deductions of up to $12,500 in qualified overtime premiums for individual filers and $25,000 for joint returns through 2028.
  • Only the premium portion of overtime pay mandated by Section 7 of the Fair Labor Standards Act qualifies for the deduction, excluding extra rates paid under state, union or company policies.
  • Employers must continue regular per-paycheck withholding but will need to record and report qualifying overtime premiums and qualified tips as separate entries on employees’ year-end W-2 forms.
  • For tax year 2025, businesses may use a reasonable estimation method to track qualifying overtime and tips before exact reporting becomes mandatory in 2026 under forthcoming Treasury and IRS guidance.
  • Colorado’s H.B. 1296 still taxes all overtime at the state level despite federal exemptions, and a proposed repeal will not be voted on until November 2026.