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Manan: The other area of complexity that our clients are looking at, especially for 2025, is how to provide this information to their employees so they know how much in qualified tips they earned during the year and how much, they should be able to deduct based on those qualified tips amounts.
The other area that we seem to be getting a lot of questions about are the qualified overtime or no tax on overtime provisions. And what the, what those qualified overtime provisions state is at the individual level, people who earn qualified overtime can take a maximum annual deduction above the line on their personal tax return of $12,500, for single filers and up to $25,000 for those who are married filing jointly with some phase-outs in there. But based on the amount of qualified overtime that individuals earned, they get, um, individual, uh, standard, individual deductions on their personal return up to those thresholds.
Now, to be qualified overtime, we really have to understand a little bit about the overtime calculation. So typically what we think about from an overtime perspective is time and a half, right? So somebody gets paid $10 an hour if they're working overtime, they get paid $15 for every overtime hour they earned, generally speaking. Um, that $5 incremental or that 0.5 premium is really all that is considered qualified overtime. It's not the full $15. So similar to the qualified tips reporting, our clients have been asking questions related to, well, how do we get that information to our employees? Do we have to send them something? Can they just look at their pay stub? Do we have to put it on their W2?
So I think kind of all these questions have come about related to, um, the qualified tips and qualified overtime provisions. So, Mindy, I know that the IRS recently came out with some guidance specific to employees on how these qualified tips and qualified overtime provisions work. Is that something you want to walk through with us?
Manan: Well, I will say that once that guidance came out from the IRS, I know a lot of my clients had a big sigh of relief because a lot of them were struggling to figure out how are we going to get this information to our employees. But I think the transition relief was very welcome. And even the IRS notice that came out a couple of weeks ago, actually provided some examples, especially in the qualified overtime space on what employees should do, specifically if they don't get information from their employees. For example, if somebody has the straight time and a half overtime provisions, and their employer doesn't necessarily separately state the half-time premium or the $5 back from my earlier example, then they have the ability to look at their full overtime computation, which would be $15 an hour. And the IRS has said, you know, divide by three in those situations, or if you're subject to some other type of overtime provision like California double time, to take that amount and divide by four. So I think you know, I think the IRS has tried to simplify this as much as possible. I also think, especially for 2025, since it's very new the position the IRS is taking is, you know, one of those, do the best you can. We don't necessarily you know, I think they're saying they don't necessarily need it to be exactly correct. Just do the best you can with the information that is available. But it does sound like there's going to be a lot more kind of strenuous requirements and reporting for 2026. John, is that what you're seeing as well?
John: Yes, I would agree. I'm seeing a lot of that. I think one question I'm getting quite a bit from employers that they're struggling with is whether or not they're going to put this information on the W2 for 2025. Um, seems the overwhelming answer is no. But I think companies are just trying to find the best way to get as much information to the employees as they can.
Mindy: Well, and and let me jump in there too, John, on that point. The one thing I'm seeing companies do and I've been a little bit surprised by this is I've seen a lot of companies taking the stance that it's a come get it from me approach where they're not, they're not providing the employees with anything. If, if anything, it's a statement saying that you may be eligible, and if you need this data, come to us. That to me can snowball at a time when payroll is going through their year end. I think to not have that calculated ahead of time, it's a, it's a calculated risk, assuming a lot of employees aren't going to come back to you for that data. Um, so, you know, companies now, I think, are back to your point, Manan, they're struggling with the underlying calc of that premium, right? So the IRS's examples to me are a little simplistic because of the fact that they're also not taking into account that there are many employers that have to recalculate what the regular rate of pay is to even determine if their number is just the FLSA number or are they paying above and beyond that, which anybody with union employees or with a benevolent company practice is probably paying above and beyond what the FLSA requires. So just dividing by that number, it'll get you there in 2025, I think, because like you said, the IRS isn't really expecting too much. But for going forward in 2026, I'd be a little bit cautious about what the underlying, you know, what the FLSA eligible wages would be.
Manan: Yeah, Mindy, that's a great point. I mean, I am not surprised that the IRS didn't get into more specificity there, especially because typically they don't, I don't see them wanting to kind of opine or even look like they're providing guidance from an FLSA perspective and what's considered regular rate of pay. But you are absolutely correct. If you look at the way the provisions work, a lot of employers really have to dig down into that level of detail if they want to get if they want to get those qualified overtime numbers right for 2026 going forward. And Mindy, I think you brought up another great point in terms of, you know, employees and going back to their employer to get the information if they ask for it. I've had some clients really try to get ahead of the curve in that and they don't want to be fielding thousands of questions around tax filing season on, hey, what's my number? So depending on the strategy that the employer is implementing, whether it's do nothing, meaning not reporting it on a W2 and not including a separate statement for 2025. I am starting to see companies look at employee communications to say, okay, we're not necessarily going to provide you this number on a W2 or separate statement, but, you know, based on the IRS provisions and based on our final pay stubs, here is what you can do to kind of look at what your qualified overtime would be. Are you kind of seeing something similar, Mindy?
Mindy: No, and definitely, and I think originally when this came out, a lot of companies and even I at that time was saying that we thought, you know, box 14 on the W2 would be a good viable option for 2025, I have since rethought that perspective just because of the fact what I'm concerned about right now, anything you put on the W2, you want to be correct, period. And so if you put something on there now and then find out, okay, the IRS is coming out with further direction, you need to clarify your number, and you put something in box 14 and now you go through and you do some revisions for one reason or the other, are you going to issue a W2C? Right. And I think it just, it snowballs. If it's not required, I would not put a darn thing on that W2 until you get this number solidified for 2026 and make sure you're comfortable with the underlying, you know, with the IRS data that they've provided, plus your regular rate of pay calcs and that you're stripping it down to the FLSA number that's required, and there then you're not going to have to do W2Cs. It'll be a good solid number for 2026. But yeah, Manan, I am seeing statements or, you know, some data going out to employees. Otherwise, again, it's busy season, you're not going to want a lot of questions going on about this, and they will come all the way through April 15th, right?
Manan: Right. Absolutely. And I think, you know, most of our clients at this point have kind of figured out what their approach is going to be for 2025, especially, I can't believe it, but we're halfway through December at this point, right? Of 2025. So, so I think most of our clients have kind of figured out what they're going to do from that perspective, and most of them are kind of looking to 2026 now, maybe working with their payroll providers or systems folks to make sure that that calculation is up and running and being able to capture whether it's qualified overtime or qualified tips kind of real time on a per-period basis. John, any, any thoughts or anything you're hearing companies as they're planning for 2026 and how they're approaching it?
John: Yeah, I think for the most part, the focus has certainly been on 2025. For 2026, it seems like a lot of companies, first thing they're doing is reaching out to their payroll providers, um, or their payroll platforms and systems to see what they plan on rolling out to assist them. Um, and I think once they have those answers, then working through what, what their part in that is going to be for 2026. But I think it's really reaching out and to vendors and looking through system capabilities to assist with this reporting in 2026, and I'm not sure we have all the answers on that yet.
Manan: I don't think we have all the answers for 2026. And the other interesting thing is, obviously, this could potentially sunset at the end of 2028 unless extended by Congress because this was a limited tax benefit. So, Mindy, any thoughts there?
Mindy: Yeah, the only thing I was going to add, there's a large national payroll vendor that came out Friday with directions for their clients around the 2026 reporting, and the direction pretty much was, give us the number and we'll put it on the W2. So, I think it wasn't, good luck, Godspeed, go forward. And, so it's going to be interesting to see what vendors are coming out with. Is there a solution or is there just a reporting mechanism? And that's the part that we, I think we've got to wait for for 2026. And companies are grappling that with, you know, with all of their, um, vendors to see what it is that their individual service providers can get them. So I think we're still in a little bit of a wait-and-see mode, plus people have to deal with year end. I think some of this is going to get pushed off to the beginning of 2026.
Manan: Yep. Mindy, I agree with that. And just kind of as a closing thought from me, you know, I think employers for 2025, just to recap, are trying to do the best they can to get the information to their employees or understand how to deal with employee questions as they arise. And then just really being prepared for 2026 for both capturing the qualified overtime and the qualified tips provisions.
John: Well, thanks guys for that very informative and detailed discussion. Hope everyone that joined has found this session by our employment tax practice to be informative and helpful in thinking about how you want to proactively address some of these challenges related to the One Big Beautiful Bill Act. In future episodes, we'll continue to address the top-of-mind issues of interest to our listeners. In the meantime, we'd love to hear from you. If you have thoughts on today's podcast episode or ideas for future episodes, please send us an email at us-taxwatch@kpmg.com. One final thanks to our audience for listening in and wishing everyone a happy holiday season and a happy New Year.
