Our friends at the Internal Revenue Service just updated its guidance for the No Tax On Overtime Rule that went into effect last year. The changes aren’t going to be easy and will cause substantial difficulties for employers.
But before I get into all of that, let’s review the basics on this law.
1 – Eligible workers can deduct up to $12,500 for single tax filers or $25,000 for married couples filing jointly of qualifying overtime on their tax returns.
2 – The deduction applies to overtime pay covered under the Fair Labor Standards Act, which says that nonexempt employees must be paid at least 1.5 times their normal pay rate for time worked beyond 40 hours per week.
3 – This is a Federal Law Only. Overtime is still fully taxable at the state level for most states.
4 – A taxpayer cannot use the “Married Filing Separately” status to claim the deduction.
5 – For single filers, the deduction begins to phase out if your modified adjusted gross income (MAGI) is over $150,000.
6 – For married filers, the deduction begins to phase out if your joint MAGI is over $300,000.
Updates to the rule include…
1 – Overtime Premium
The rule only applies to an Overtime Premium, not the entire amount of overtime pay. If a worker normally makes $20 / hour, and you pay them $30 for overtime hours, then only the $10 premium applies.
2 – W-2 Reporting
Last year, employers were not “required” to put any of this information on their W-2’s. But this year, employers must put the amount eligible for the deduction on workers’ W-2s, in box 12 using a “TT” code.
3 – FLSA & Union Laws
If state law or a union agreement requires overtime pay that is different from the FLSA, only the portion mandated under the FLSA qualifies for the deduction.
Let me leave you with this…
I hope you didn’t need to either pour a Martini or take an ant-acid as you read this. These new rules will amount to a S**T Storm.
The problem is that unless you have a law degree and have practiced employment law for the last 20 years, how will anyone actually be able to follow this new letter of the law?
Just a few of the problems I can foresee are as follows…
1 – If you have a worker that earned $40K in regular pay and another $15K in overtime, but only $5K of the overtime is the “premium”, they aren’t going to be really happy when they get their W-2. They’re going to expect to not be taxes on the full $15K.
2 – Using the prior number as an example, the worker should be paying income tax on $50K with $5K shown as “premium overtime”. But what happens if the W-2 comes out wrong? What happens if the W-2 comes out with $40K in wages and $15K in overtime?
What do you do then? I’m going to ask my tax clients who have overtime on their W-2’s to also forward a copy of their last paystub so that I can check the W-2.
If it’s wrong, I can’t just change it on the return. If I did, the return would trigger a flag in the IRS system, and the employee would risk being audited.
This is going to require employers to amend a ton of W-2s.
And what about all of that nonsense about FLSA, State, and Union Law? Does anyone understand any of that?
The Feds are going to make a fortune off of this in additional tax, interest, and penalties. If you have questions, please call.
And for those of you who aren’t a client yet, if you’re having difficulties with your accounting and tax work, please contact us today. We’d love to help.
We’re all going to get through this. Let’s get through it together..
Accounting Solutions Ltd. stands ready to complete our mission and purpose of protecting you, your family, and your business. Whether you need Payroll Services, Accounting and Tax Work, Tax Planning, or Tax Representation, you have but to ask. I’m here and I remain,
Sincerely yours,
Chris Amundson
President
Accounting Solutions Ltd.
773-267-7500
888-310-0300
www.AccountingSolutionsLtd.com
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