Two new federal deductions for tips and for the Fair Labor Standards Act of 1938 (FLSA) overtime premium take effect for workers starting in 2025.
That does not mean you change your W-2s this year. The IRS has said there are no changes to Forms W-2/1099 or withholding tables for tax year 2025. Updated reporting is targeted for 2026. Keep using your current payroll process in 2025 while you get systems ready.
What Counts as “Qualified Overtime”
Only the FLSA-required premium (the “half” in time-and-a-half for hours over 40) qualifies for the new deduction, not straight-time wages or state/contract extras. That’s the definition the IRS is using for the deduction (2025–2028).
Note: These are income-tax deductions for the employee. Payroll taxes (FICA/Medicare) still apply and you should continue normal withholding.
Your Compliance Roadmap
2025 (transition year): keep reporting as usual, start tracking better
- Do not change W-2/withholding or payroll returns for TY 2025.
- Begin tracking the FLSA overtime premium separately (distinct from straight-time). This positions you for 2026 form changes and helps employees document deductions on their 2025 returns. (IRS has indicated transition relief while fuller guidance is finalized.)
- If you have tipped staff, ensure your tip-reporting process is accurate; the IRS will publish the list of occupations that “customarily and regularly” received tips by Oct. 2, 2025.
2026 (first year with new boxes/fields)
- Expect new W-2 information fields for qualified overtime (and for tips) and updated instructions.
- Coordinate early with your payroll provider to map fields and test.
Practical Steps
Work with your payroll provider to confirm:
- You can track FLSA overtime premium separately from straight-time.
- You’ll be ready to populate the new 2026 W-2 fields once released.
- You can annotate pay stubs or give YTD summaries so employees see their qualified overtime totals.
Train your managers/payroll staff on:
- The difference between FLSA overtime premium vs. other pay codes.
- Why tips do not equal service charges (service charges aren’t “tips” for the tip deduction).
- How to answer basic employee questions and point them to a tax pro for specifics.
Communicate to employees:
- How much qualified overtime they earned during the year
- Potential tax benefit available to them
- Requirements for claiming the deduction on their tax returns
- Income limitations that might affect their eligibility
Quick FAQ
Do we change W-2s in 2025?
No. No 2025 changes to W-2/1099/withholding. Updated forms are expected for 2026.
What overtime qualifies?
Only the FLSA premium (the extra half-time) required under section 7 of the FLSA, not state-only or contract-only extras.
What about tips?
For the separate tip deduction, the IRS will publish a list of eligible occupations by October 2, 2025. Keep following current tip-reporting rules until 2026 form changes.
Do payroll taxes change?
No. These are federal income-tax deductions only; FICA/Medicare still apply.
Bottom line for Kansas employers
- 2025: Keep current payroll reporting; start tracking FLSA overtime premium cleanly and prepare employee communications.
- 2026: Implement new W-2 fields once released; continue training and documentation.
Getting Professional Help
When to seek assistance:
- Complex payroll systems requiring significant updates
- Multi-state operations with varying requirements
- Union environments with specific reporting needs
- Uncertainty about compliance requirements
What professional help provides:
- System selection and implementation guidance
- Compliance procedure development
- Employee communication strategy
- Ongoing support as requirements evolve
Ready to ensure payroll compliance with new overtime reporting requirements? Contact us to assess your current systems, plan necessary updates, and develop compliant procedures that maximize employee benefits while meeting all regulatory requirements.
