Enacted in the One Big Beautiful Bill Act (OBBBA), the overtime tax break allows certain workers to deduct up to $12,500 for single filers or $25,000 for married couples filing jointly per year from 2025 through 2028. The deduction goes on a new form, Schedule 1-A, which includes the new tax breaks for tip income, seniors, and auto loan interest.
As of March 4th, the IRS had received almost 56 million returns, and 43% included Schedule 1-A, according to Frank Bisignano, the newly minted IRS CEO. The overtime deduction has been “the largest filing category” for that form, he also said.
According to the IRS, OBBBA’s overtime deduction only applies to a “specific type of earnings.”
You must have compensation covered under the Fair Labor Standards Act, or FLSA. The law says non-exempt employees must receive at least 1.5 times their normal pay rate once they exceed 40 hours per week. But some workers covered by state or labor contract mandates are excluded.
In 2023, roughly 98M employed workers were eligible for overtime under the FLSA, according to an analysis from The Budget Lab at Yale. But only 8% of hourly workers and 4% of salaried workers have FLSA-qualified overtime on a regular basis.
But this filing season, it may not be clear to taxpayers how much to claim for the overtime deduction because the IRS waived reporting requirements for employers for tax year 2025. That means that many workers won’t see overtime listed on their W-2’s.
Instead, some may need payroll statements or their final pay stub from 2025 to calculate overtime totals. But the deduction is only for the “overtime premium,” which is the one-half portion if overtime is 1.5 times the normal rate.
According to the IRS, if you see a lump sum on a payroll statement, you calculate the overtime premium by dividing it by 3 for 1.5 times your regular pay, or by 4 for 2 times your regular pay.
Let me leave you with this…
When they passed this law I told all of you that it was going to turn into a s**t show, and here we are.
First they passed a law that disqualifies many people from the deduction. Second, they then told employers that they didn’t need to properly show overtime on W-2’s.
And third, let’s not forget that handling the deduction correctly under the law is one of the most confusing things I’ve ever encountered, but that’s not the worst part.
If you aren’t seeing the potential for large scale tax evasion, you’re not looking closely enough. Someone preparing their own return could falsely claim that a portion of their income was qualifying overtime, and then state that their employer didn’t include it on their W-2 because there was no requirement in 2025.
This is a nightmare. And if you don’t think that our friends at the IRS aren’t licking their chops thinking about all the additional tax, interest, and penalties they’ll collect on these, you’re wrong.
Why? Because a computer can easily find these errors by electronically matching a taxpayer’s W-2 to their electronically filed return. And when they don’t match, the Service will simply send a change letter demanding payment.
Whether the fraud was intentional or not, this situation will escalate, and the next one will certainly be the No Tax On Tips Law. This situation also involves issues where…
1 – Not everyone qualifies
2 – Employers weren’t required to file the W-2’s correctly
3 – There’s plenty of potential for fraud.
Be careful. If your taxes aren’t filed correctly you could be the next contestant on that fun-filled family game show where you get three hots and a cot, called “Don’t Drop The Soap.”
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, or Accounting and Tax Work, 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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