Do employers report overtime differently for exempt vs nonexempt employees?
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Executive summary
Employers must begin tracking and reporting “qualified overtime compensation” differently than other pay because the One Big Beautiful Bill Act (OBBBA) created a temporary tax deduction for overtime paid under the Fair Labor Standards Act (FLSA), effective for tax years 2025–2028; employers will report those amounts on W‑2s or other information returns and may place a separate informational amount under Box 14 or Box 12 depending on guidance and agency practice [1] [2] [3]. During 2025 the IRS designated a transition year with flexible “reasonable methods” for employers to calculate and report qualified overtime, but tighter, specified reporting (e.g., Box 12 code “TT” on W‑2) is expected in 2026 [4] [5] [3].
1. The legal change that forces different reporting for some overtime
Congress added a temporary deduction for “qualified overtime compensation” in the OBBBA, which means certain overtime premiums — generally the portion paid over an employee’s regular rate required by FLSA — must be tracked and shown on information returns so workers can claim the deduction [1] [6]. The deduction applies to nonexempt employees’ FLSA-qualified overtime and is limited by income thresholds and other rules in the statute [7] [8].
2. Transition year: flexible methods, uneven 2025 reporting
For tax year 2025 the Treasury/IRS designated a transition period: employers are expected to track qualified overtime but the IRS allowed “reasonable methods” and provided penalty relief while payroll systems adjust, so how overtime appears on pay stubs and W‑2s can vary in 2025 [5] [3] [4]. Several state payroll offices have already instructed agencies to put the amount as an informational entry (e.g., code OT in Box 14) for 2025 W‑2s, reflecting patchwork practices this year [2].
3. From 2026: clearer, separate reporting on W‑2s is planned
Guidance and draft IRS materials indicate that beginning in 2026 employers will be required to separately report qualified overtime on W‑2s — the IRS draft directs use of Box 12 with code “TT” for the total qualified overtime amount — so employers will no longer be able to bury premiums in gross wages if they want to comply with information‑reporting rules [3] [1].
4. Exempt vs. nonexempt: reporting difference is driven by FLSA status
The new tax benefit is available only to nonexempt employees who receive FLSA‑qualified overtime; therefore employers must distinguish between exempt and nonexempt staff for reporting and recordkeeping. Employers need to maintain records that separate FLSA overtime premiums from other pay so W‑2 reporting is accurate [9] [3].
5. Practical payroll implications and employer choices
Payroll departments must adapt systems to compute the “overtime premium” (the amount over regular pay, e.g., half of time‑and‑a‑half) and either calculate it centrally or rely on department data; some state payroll teams said they will centrally compute and put a separate Box 14 entry to simplify departmental burdens [2] [10]. The IRS safe harbor and transition relief for 2025 reduce immediate penalties but do not eliminate the need for changes to timekeeping, classification, and pay‑code practices [5] [10].
6. Incentives, reclassification risks and competing viewpoints
Several employer and labor‑law analyses warn the deduction could create incentives for employers to reclassify exempt salaried workers as nonexempt to let workers claim the overtime deduction or to redesign pay structures — a move that brings tradeoffs: clearer overtime pay for workers but new timekeeping rules, potential morale losses, and compliance burdens [9] [11]. Legal advisories stress employers must weigh operational costs and employee perception when considering reclassification [9].
7. What employees will see this year vs. next year
Employees may not see a consistent “overtime” line on 2025 paystubs or W‑2s because employers can use reasonable methods during the transition; by 2026 the IRS expects a standardized separate reporting field so tax preparers and workers can apply the deduction more reliably [5] [3] [7].
8. Limits of available reporting and remaining unknowns
Available sources describe the statutory change, transition relief, and draft reporting mechanics (Box 12 code “TT” and Box 14 practices), but do not provide finalized 2026 instructions or uniform payroll software requirements — employers must follow final IRS rules when issued and consult payroll/legal advisors for implementation [3] [1].