Overtime Tax Exemption: What Employees Need to Know...FAQ

We know tax and payroll changes can feel overwhelming — so here’s a clear breakdown of what the new overtime tax rule means for you and what (if anything) you need to do. Think of LNJ Employer Services as your local resource!

What is this new overtime tax rule?

In July 2025, the federal government passed the One Big Beautiful Bill Act, which allows certain overtime earnings to be deducted when you file your federal taxes FAQ OT OBBBA.

This change applies retroactively to January 2025.

• 2025: Reporting is optional (there is a grace period)

• 2026 and forward: Reporting will be required

Starting in 2026, qualifying overtime premium pay will be shown in a separate box on your W-2.

What type of overtime qualifies?

Only non-exempt employees qualify. This includes:

• Hourly employees

• Salaried employees who are classified as non-exempt

To qualify, overtime must be earned by working more than 40 hours in a 7-day workweek.

How much of my overtime qualifies?

Only the overtime premium portion qualifies — not the full overtime amount.

Under federal law, overtime is paid at time and a half.

• The “half” is the premium

• The regular hourly portion does not qualify

Example:If you earn $10/hour and work 41 hours:

• Overtime rate = $15

• Qualifying premium = $5

• Regular $10 portion = not included

What’s the difference between exempt and non-exempt?

• Non-exempt employees are eligible for overtime pay

• Exempt employees are not

Hourly employees are almost always non-exempt.Salaried employees only qualify if they are classified as non-exempt and receive overtime pay.

Will my paycheck change?

No.You will not see more money in your weekly or bi-weekly paycheck, and federal taxes will still be withheld as usual.

This benefit is applied when you file your taxes, which may result in a larger refund, depending on your income and filing status.

Will anything change on my W-2?

Yes — but not until year-end.

You will see a total amount listed in Box 12 of your W-2 showing the overtime premium pay earned for the year.

What if I worked for another employer in 2025?

The IRS has allowed a grace period for 2025. If a previous employer did not report this information:

• Provide your final 2025 paystub to your tax preparer

• This will help them calculate your deduction correctly

The IRS issued final guidance late, so many employers didn’t have time to implement reporting for 2025.

How do I know if I qualify for the deduction?

Eligibility depends on your income level and filing status. Your tax preparer can determine this for you.

If your tax preparer doesn’t ask about this deduction — that’s a red flag. Missed deductions often mean money left on the table.

I usually do my own taxes or use a seasonal preparer. Is that okay?

As a payroll provider, LNJ Employer Services strongly recommends working with a year-round, local tax professional.

Tax questions don’t only come up during tax season, and you deserve a preparer who is available, knowledgeable, and working in your best interest. We’re happy to refer trusted professionals when needed.

What is LNJ Employer Services doing about this change?

We’re ready.

✔ Our payroll software is fully updated for 2026

✔ We’re tracking required data accurately

✔ We’re keeping our clients informed and prepared

If you know someone who may have questions, feel free to share this information or send them our way — we love making complicated things easier to understand.

LNJ Employer Services

Stacy Cooper, CEO, SHRM-CP

📞 251-273-4754

Ask me about Workforce Hub - A Payroll system built for acuracy. Designed for compliance.

~ Stacy Cooper