Article up to date 9/10/25 to replicate proposed 2026 Kind W-4 modifications.
Tucked inside the large One Huge Stunning Invoice Act (signed on July 4, 2025), the brand new “no tax on additional time,” rule provides many hourly staff a purpose to pay nearer consideration to their pay stubs. Retroactive to January 2025, eligible workers can deduct a piece of their additional time earnings from their federal taxable earnings. The thought is easy: work extra, maintain extra.
Extra time pay, or time and a half, is at present taxed like common wages. The “no tax on additional time” rule offers a federal earnings tax deduction equal to additional time wages reported in a yr.
Certain, you’re not prone to hear workers complain about paying much less in taxes. However what does this new tax regulation really imply for a way you deal with additional time in payroll? Let’s break down the “no tax on additional time” rule and the way it impacts your workers on payroll.
Overview of additional time pay and taxation
Underneath federal regulation, additional time is 1.5 instances an worker’s common hourly wage for every hour labored over 40 in a workweek. Nonexempt workers are entitled to additional time pay below the Honest Labor Requirements Act. Solely 12% of workers work FLSA-qualified additional time recurrently, and an extra 5% work FLSA additional time sometimes.
Is additional time taxed in another way than common wages? No, additional time is topic to the identical taxes as common wages, together with federal earnings, Social Safety, and Medicare taxes.
When workers obtain additional time wages, you calculate and withhold taxes the identical means as you do for normal wages. It’s essential to remit all withheld taxes to the correct companies and report earnings and taxes on Kind 941 and every worker’s W-2 type.
The brand new additional time taxation regulation exempts workers’ additional time wages from federal earnings tax.
What’s the new “no tax on additional time” regulation?
Like one other well-liked provision, “no tax on suggestions,” the “no tax on additional time” is a key element of the One Huge Stunning Invoice Act (OBBBA).
This laws permits a federal earnings tax deduction particularly for additional time pay, aiming to supply monetary reduction to eligible staff by means of tax deductions on additional time wages.
How does the “no tax on additional time” regulation work?
Nonexempt workers who work time-and-a-half hours (i.e., hours past 40 in a workweek) can now declare a federal earnings tax deduction equal to the certified additional time compensation they obtain in the course of the taxable yr when submitting their earnings taxes. The tax deduction for additional time wages is on the market for tax years 2025 by means of 2028.
The “no tax on additional time” solely applies to nonexempt workers who work FLSA-qualified additional time. The tax deduction wouldn’t be out there to extremely compensated workers. Staff can solely declare a tax deduction on additional time federal earnings taxes in the event that they make as much as $160,000 and have a Social Safety quantity.
It’s essential to level out, the tax deduction is just for the “premium wages” paid on additional time (the “further half” of time-and-a-half pay) if the worker meets the IRS necessities.
And, the “no tax on additional time” solely applies to federal earnings tax. Nonetheless, a number of states are additionally contemplating a no tax on suggestions and additional time regulation as properly.
Do employers nonetheless withhold taxes on additional time?
Sure. In case your workers work greater than 40 hours in per week, you continue to want to trace and tax the additional time wages like another wages. It’s essential to proceed withholding federal earnings tax, Social Safety, and Medicare in addition to any state or native taxes from additional time wages simply as you’d with common wages. Extra time pay stays absolutely taxable.
What’s modified is that workers might now be eligible to deduct as much as $12,500 for people and $25,000 for joint filers of their gross additional time wages once they file their federal tax return. This deduction might cut back their taxable earnings, probably decreasing what they owe or rising their refund.
Be ready for workers who might alter their W-4 type to decrease their tax withholding all through 2025. The IRS has proposed a brand new Kind W-4 for 2026 . On it, the deductions worksheet for step 4(b) now contains fields for estimated tip earnings, the “and-a-half” portion of additional time, in addition to different new fields. Both means, when an worker adjusts their federal earnings tax withholding, you will need to replace your payroll.
Steering for monitoring additional time on 2025 worker W-2s
On August 7, 2025, the IRS confirmed* that for Tax Yr 2025, Kind W-2, Kinds 1099, and 941, and the federal earnings tax withholding tables will stay unchanged in the course of the phased rollout of the One Huge Stunning Invoice Act. Up to date steerage and new kinds are deliberate for 2026.
Whereas payroll reporting received’t change in 2025, correct additional time monitoring might be important for workers who need to declare the federal additional time tax deduction on their 2025 returns. Despite the fact that additional time received’t seem individually on the W-2 this yr, workers can nonetheless deduct the FLSA additional time premium in the event that they meet the IRS necessities.
So the place would you are available in? This doesn’t change your payroll course of, however it does imply your additional time monitoring must be correct. Employers needs to be conscious that monitoring might get extra complicated, particularly in states or localities with stricter additional time guidelines than the FLSA. These extra quantities won’t qualify for the federal deduction.
Be certain FLSA additional time hours and premium pay are recorded clearly and accessible to workers. Utilizing time and attendance software program can assist preserve correct, digital information and make year-end reporting simpler for everybody.
*The IRS has acknowledged it’s going to present transition reduction for tax yr 2025 for taxpayers claiming the deduction and for employers and different payors topic to the brand new reporting necessities. What meaning stays to be seen. We’ll replace this text as new info turns into out there.
Proposed 2026 Kind W-2 additional time reporting modifications
The IRS has launched a draft of the 2026 Kind W-2 introducing code TT for Field 12 for employers to report FLSA certified additional time compensation, the half-time premium that workers might exclude from taxable earnings.
“No tax additional time” FAQs
Sure, additional time hours are topic to taxation like common wages. Employers will withhold as they usually will in payroll. Staff who qualify might be able to declare a tax deduction on additional time wages when submitting their earnings taxes.
Not fairly. The One Huge Stunning Act launched a brand new tax break that lets workers deduct a part of their additional time pay, as much as $12,500 for people and $25,000 for joint filers, on their federal earnings tax return. However this doesn’t change how payroll is run. All common payroll taxes nonetheless apply to additional time, and paychecks will look the identical all year long. The deduction solely kicks in when workers file their taxes at year-end.
The purpose of the tax break for nonexempt workers who work additional time is to allow them to maintain extra of their wages.
For the 2025 tax yr, nothing modifications on worker W-2s. Nevertheless, employers needs to be monitoring additional time for workers individually till additional steerage from the IRS is launched for 2025. Go to Patriotsoftware.com for extra updates as they develop into out there from the IRS.
The supply is retroactively efficient from January 1, 2025, and can stay in place by means of the top of 2028. This implies additional time earnings from the start of 2025 are eligible for the deduction.
Staff received’t see speedy modifications of their take-home pay on paychecks (except they alter their Kind W-4 withholding). The profit is realized when submitting federal tax returns; an worker’s taxable earnings might be diminished by the quantity of qualifying additional time, probably leading to a bigger refund or decrease tax legal responsibility.
No. Despite the fact that federal earnings tax will not be utilized to qualifying additional time, Social Safety and Medicare taxes nonetheless are. Subsequently, your social safety tax contributions, (and future advantages) stay unaffected.
The “no tax on additional time” provision solely applies to deductions on federal earnings taxes. It doesn’t embrace state (or native) tax deductions. Though Alabama had an exception for additional time hours, it expired in June 2025. Different states are contemplating some kind of additional time or suggestions legal guidelines sooner or later, however would have to be handed on the state degree.
The IRS hasn’t but issued steerage on additional time reporting. Employers ought to look ahead to upcoming directions on utilizing a “affordable approximation” technique to calculate additional time for the 2025 transition tax yr, which is anticipated to be launched later this yr for distribution to workers.
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