FIS: No Tax on Overtime - OBBBA Tax Changes

FIS: No Tax on Overtime - OBBBA Tax Changes

Use this article to review the steps needed to prepare for reporting the FLSA - Qualified Overtime on Staff W-2s for  the 2025 tax year.
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Information: What the Law Actually States
  1. Tax Deduction, Not Exemption
    1. The law provides a tax deduction for eligible employees, not a complete exemption from taxes. You will still pay taxes on overtime wages during the year through payroll withholding.  The benefit is realized when staff file their 2025 federal tax return in 2026.
  2. Deductible Amount
    1. The deduction applies to the "half" portion of "time-and-a-half" compensation required by the Fair Labor Standard Act (FLSA).
    2. Example: If a staff's regular rate is $25/hour and the overtime rate is $37.50, the deductible portion is the extra $12.50 per overtime hour.
  3. Deduction Limits
    1. $12,500 for single filers;
    2. $25,000 for those married filing jointly.
  4. Income Phase-Out
    1. The deduction begins to phase out for taxpayers with a modified adjusted gross income over:
      1. $150,000 for single filers;
      2. $300,000 for married couples filing jointly.
  5. IRS Reporting Guidance
    1. The IRS has released a draft of the 2026 W-2 form, which includes a new code for Box 12 labeled "TT" to report qualified overtime compensation. 
    2. For 2025, no specific reporting instructions have been provided.  Employers must accurately track FLSA mandated overtime and provide employees with a clear summary to help them claim the deduction when filing taxes.
Alert
Links provided offer information on FLSA overtime rules and regulations.  As an employer, you are permitted to be more generous with overtime payments; however, the law requires that overtime must be paid when a non-exempt employee works more than 40 hours in a week.  Only the hours worked more than 40 in a week to a non-exempt employee are included in this change in the law.
Length: 1:19:52 Recorded on 10/28/2025

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New Tools to Assist with Calculation and Reporting Qualified Overtime Compensation

Updates to the Payment Type Directory

  1. Review is Required: Payment Types with "Report As" set to Hours or Supplemental must be reviewed and updated.  
  2. The H -Hours and OTWA - Overtime - Weighted Average Payment Types are defaulted for you.
  3. All other system defined payment types are not eligible to be used for Qualified Overtime Compensation.

New Fields Added:

    1. FLSA Overtime Eligible Checkbox: Required for 2025 and beyond to calculate the selected payment types Qualified Overtime Compensation. 
    2. The Rate Entered is: Used to correctly identify the calculation method. Four options are available to define how each payment type is used.
      1. A regular rate used for straight time.
      2. An overtime rate at 150% of the regular rate.
      3. An overtime rate more than the regular rate, but not exactly 150%.
      4. The overtime premium. 
Options 1, 2 and 3 above are available for selection when reporting units to PSERS as hours.
Option 4 above is only available for Supplemental Payment Types since hours are not being reported to PSERS.
  1. If you are currently using a payment type that reports to PSERS as Supplemental and are entering valid hour units that are considered FLSA Overtime Qualifying, it is advisable to update the payment type to report as hourly. 
  2. After making this change, select the appropriate option in the "The Rate Entered is", reviewed below, and ensure that the method used to enter both the rate and units is in alignment with the selection.

Samples: 

All payment types that need to be reported as FLSA Overtime Eligible must have the corresponding checkbox selected.  Refer to the examples below for the appropriate value to enter in the "The Rate Entered is" field.

1. Payment Types for Hourly Wages
  1. These payment types are created to provide better information on pay stubs and documentation in Pay History, while still being used to pay staff hourly wages.
  2. To use this option for Qualified Overtime, the "Allow OT Calculation" checkbox and the "FLSA Overtime Eligible" checkbox must be selected.  
  3. The value in "The Rate Entered is" field should indicate a regular rate, not an overtime rate. Do this by selecting "A regular rate used for straight time" from the list.
  4. Ensure that the regular rate is entered for these payment types.
  5. The FLSA Overtime Premium is defaulted from the rate for records on Staff Wage and in Payroll Entry.
  6. When Overtime Units are entered into Payroll Entry, the system will automatically calculate the Qualifying Overtime Compensation. 

The H-Hours payment type is defaulted for you.


2. Payment Types for Overtime Wages for Salaried Staff
  1. These payment types are created to pay overtime wages to salaried staff and report the supplemental income to PSERS.  Since overtime hours cannot be reported to PSERS unless regular hours are also reported, units for these payment types are entered as regular units and the rate is entered as the overtime rate.
  2. To use this option for qualified overtime, DO NOT check the "Allow OT Calculation" checkbox.  The "FLSA Overtime Eligible" checkbox must be selected.  
  3. The value in "The Rate Entered is" field should indicate that the overtime half-time rate is already included in the entered rate.  Do this by selecting "An overtime rate at 150% of the regular rate" from the list.
  4. The Rate entered will default the Overtime Premium value for that record.
  5. Qualified Overtime Compensation is calculated by multiplying the Regular units by the Overtime Premium.

3. Payment Types with Variable Rate Rules
These payment types are not created as hourly rates but are used to represent at least one hour of work, where overtime may need to be reported as FLSA Qualified Overtime Compensation. 
Please make sure that the time and amounts are qualified per FLSA rules.
  1. To include these payments as Qualified Overtime Compensation the "FLSA Overtime Eligible" checkbox must be selected on the payment type. 
  2. The value in "The Rate Entered is" field should indicate that the rate is an overtime rate, but not exactly 150% of the regular hourly rate.  Do this by selecting "An overtime rate more than the regular rate, but not exactly 150%" from the list.
  3. The FLSA Overtime Premium is NOT defaulted from the rate when entered on Staff Wage or Payroll Entry.
  4. You will need to enter the value of the half-time overtime premium in the OT Premium field manually.
  5. Units should be entered in the Regular Units field in Payroll Entry. 
  6. Qualified Overtime Compensation is calculated by multiplying the Regular units by the Overtime Premium.
  7. To ensure consistency in FLSA Overtime calculations, all payments made under a single payment type must qualify the same way. If the FLSA eligibility rules vary depending on the scenario in which a staff member is paid, you must create separate payment types for each case.
    1. For example, if a similar payment type is needed but does not qualify under FLSA rules, create a new payment type without the “FLSA Overtime Eligible” designation.


4. Supplemental Payment Types Used for Payment of Hours
Although permitted, using Supplemental Payment Types for hourly work is generally not recommended. 
However, it may be appropriate in specific cases - such as the system defined Overtime - Weighted Average where the payment is made at the overtime rate and actual hours worked are found on the Hours payment type.  In these scenarios, this approach is considered valid.
  1. The FLSA Overtime Eligible needs selected.
  2. The value in "The Rate Entered is" field can only be set to "The overtime premium"
  3. The FLSA Overtime Premium is defaulted to the rate entered on Staff Wage or Payroll Entry.
  4. Units entered in the Regular Units field in Payroll Entry are used to calculate the Qualified Overtime Compensation amount. 


PSERS Work Report for FLSA Eligible Hours

Please review your user defined payment types with the purpose of correctly reporting time worked to PSERS.  Any payment type that meets the standard to be identied as FLSA Overtime Eligible should also meet the standard for reporting hours to PSERS.

Alert
Please review all your Payment Types and how they are used.  If your policies do not follow FLSA guidelines for identifying overtime wages, a full review of your practices and payment types will be necessary.

New Report Available

The Pay History Reports > Hourly Daily Reports menu option has been updated to include a new Report Option: FLSA Overtime Review.

The Hourly Daily Report file will serve as your resource to review overtime payments and make updates if necessary.  This file will be used to import the FLSA Overtime Amount for the 2025 W-2s.  


When running this report:
  1. Select the calendar year to review. 
    1. It is expected that two files will be created and reviewed and then the final results will be saved into a single file.
    2. Note:  You may need to generate more than two files, depending on the timeframe you select to review.  
  2. Payment Types marked as FLSA Overtime Eligible are available for this report. 
  3. Review the calculated FLSA Overtime amount based on the values assigned to each payment type and Pay History Account record information.
    1. The FLSA OT Amount is determined by the Payment Type identification:
      1. "A regular rate used for straight time" uses the OT units
      2. "An overtime rate at 150% of the regular rate" uses the Hours or Other Units 
      3. "An overtime rate more than the regular rate but not exactly 150%" cannot be calculated and requires you to enter the amount
      4. "The overtime premium" uses the Other Units and set the amount equal to the Rate * Units 
  4. Select Staff records; either individually or with the Select All button, and then select to Print All Selected. 
  5. Create the file to review and update the FLSA OT Amount values.
  6. The final reviewed and updated file will be used to load the amounts onto the W2 records for 2025 reporting.

2025 W-2s

 Please register for the upcoming End of Calendar Year Payroll trainings, where we will cover how to handle the file once all year-end reviews are completed.
Alert
Please register for one of the trainings in December to review the normal W-2 process and the changes related to reporting the FLSA Qualified Overtime Compensation for 2025.

Payroll Processing Changes for 2026 Payrolls

The Staff Payroll Wage Information and Payroll Entry screens will be updated to include a new Overtime Premium field.  The Payment Type assigned to each wage record will determine whether the OT Premium is automatically defaulted or requires manual entry.  In Payroll Entry, the Overtime Premium will be used to calculate the Qualified Overtime Compensation. This value will be stored in Payroll History records and used for reporting on the 2026 W-2s.
Alert
Please register for the training on December 16th to review the new processing changes related to storing the FLSA Qualified Overtime Compensation amount with every eligible entry.

Staff Employment Exemption Status

The Staff>Mass Updates > Mass Update Staff Employment Groups menu option allows you to quickly and easily assign the correct value to the Employment Status field found on the Staff Employment record.
Use this option to update all active staff records by Class or by Contract.  Keep in mind that all staff may not be found assigned to a Contract but all staff should be assigned a Class value.