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For example, in 2025, the IRS did come out and say that there will be no changes to the Form W-4, which is what employees provide their employers with respect to how much to withhold from a federal income tax perspective. So there's going to be no changes in 2025. However, the employees can still use their W-4, adjust the numbers to take into account the potential deduction for qualified overtime.
What we did see is that the IRS put out their draft 2026 W-4, and while the W-4 itself hasn't changed, there is going to be a change to the calculator, which takes into account qualified overtime and qualified tips. So employees will be able to use the updated worksheet to calculate and reduce their withholdings based on their projected qualified overtime and/or qualified tips.
Mindy: Manan, I've got a quick comment on that. This is a quick turnaround for the IRS. So do we see any future changes going on or do you think W-4s are going to stay as is?
Manan: That's a great question, Mindy. I believe it's probably going to stay the same. The way that the benefit is monetized is at the individual level. So the W-4s are important there. The good thing from an employer perspective is that there should not be any changes to the withholding methodology in their systems right now until the employee provides an updated Form W-4.
John: Thanks, Manan. So we know we're going to have some change to the W-4. Are there any changes to the 2025 W-2 that employers are going to start needing to prepare for year-end?
Mindy: No, and this was a pleasant surprise for everybody. We really expected to see some 2025 changes pushed through. And payroll services everywhere were not prepared and had really already stressed to the IRS that they could not handle any changes before year-end. So, we have heard that there are no reporting requirements for 2025 on the W-2s. And so at this point, it's going to be left up to companies on how they're going to deal with this because there is no requirement and yet the exclusion still exists both for tips and overtime.
Manan, I know we've been hearing a lot from clients and just from companies in general about how they're going to handle this and because it's not on a W-2, what is the mechanism? Is the IRS going to have any requirements on this? And what are we seeing right now? And what are you hearing from your companies that you're dealing with on this?
Manan: That's a great question, Mindy. And I think it's worthwhile to take a quick step back and just understand and talk through what is going to be reported either to the employee or on the W-2s in 2026 going forward and really getting into the definition of qualified overtime.
The way OB3 was written, the qualified overtime, which employees will actually get an above-the-line deduction for on their personal return, it's really just the premium pay component of the FLSA overtime rules that needs to be reported. The easiest way to think about this is, I think everybody's kind of general understanding of overtime is that once somebody hits over 40 hours, that 41st hour forward, you get paid a time and a half. Well, the qualified overtime is just that half-time premium. So if somebody makes $10 an hour, their 41st hour of the week under FLSA, they would make $15 an hour. The qualified overtime that needs to be reported is just that $5 premium.
Now, of course, this becomes complicated in areas where employers need to provide something more generous than the half-time premium. For example, in some states like California, there may be a double-time requirement. So in my example where an employee makes $10 an hour, with the double-time requirement, the employer could be required to pay them $20 an hour, and that would be a $10 premium. However, for qualified overtime reporting purposes, it's really only that $5 premium. So what I'm hearing from clients is there's a lot of complexity there, especially when you start talking about double-time rules, or I've had clients come to me to ask about salaried non-exempt personnel and how they should be treated. So that's the type of complexity that we're hearing.
Also, I think I'm getting a lot of questions on, well, in 2025, how should this be reported to the employee? Because the information has to come from somewhere. Mindy, have you heard those questions as well?
Mindy: We're definitely getting those. So the first issue goes around exactly what Manan said, gathering that premium amount, if you can get there. The IRS is now saying that that amount isn't necessary for 2025 reporting. Your employees really have no way of knowing what this number is. More than likely rolling through the payroll system is going to be a bucket that's going to say "overtime." And that's not the premium portion, that's all overtime. And so it could be double-time, it could be time and a half. So you still need to pull this out for your employees.
Now, keep in mind that the IRS has stated that by October 2nd, they are going to have some information coming out. We did talk with some individuals who are proficient in individual return preparation and they said one issue that we're going to have is that the IRS is not going to take an employee's word for what their excluded income is. So what is going to be that mechanism now that it's not on a W-2?
I've had some companies say that they're going to automatically try to push that number into Box 14 and note it as an overtime premium so that employees have that. Others have stated that they're going to try to generate their own internal statements to employees. But once again, while the IRS acknowledged that payroll services can't get this information out in time, they've still left companies in the lurch with what is the mechanism and how do we get this information over to our employees. So the bigger issue is how do you get this information, right? And how do you calculate that premium component and have that? But now, how are you going to relay it to your employees that for overtime or for tips, that they have the data that they need to put it on their personal return? And what is the IRS going to accept? Is it going to be the employee's estimation? Do they have to have something from their employer to show what that dollar amount is? We're kind of on hold for that. Hopefully, we hear something on October 2nd, crossing our fingers.
But Manan, I mean, I assume you're getting the same data back from your clients trying to figure out what to do with this number once they get it, right?
Manan: Yes, that's exactly right. And another question I'm getting is, I know in OB3, there was a mention of a transition rule for 2025 for calculating that overtime premium. I have not heard anything from the IRS on what that transition rule could look like. Again, hoping that we'll get that information by October 2nd. But Mindy, are you hearing that from clients as well in terms of potentially relying on the transition relief?
Mindy: Yeah, and I think everybody's kind of waiting to see what that is, right? Even October 2nd is a late date for the IRS to get any information out for anybody to get anything meaningful in place by year-end. So I think it's still pushing companies up against the wall with this. But yeah, I think that everybody's hoping that that October 2nd IRS document is very robust. The IRS has asked for comments back, and hopefully, people are providing what their questions are now so that we get as much answered as possible. But this year is usual, I think it's going to be a mess, right? Hopefully, things will straighten up next year before we get W-2s going. And technically, you need to have something in place by January at the latest to start pulling this data for the 2026 W-2 reporting because that's definitely where the rubber meets the road because you're going to have a W-2 requirement.
John: That's a great segue, Mindy, thank you. Manan, do we know anything yet about the 2026 W-2s?
Manan: So the IRS did, I think within the last couple of weeks, provide a draft of the 2026 W-2. And in that draft, they've updated Box 12 to include new codes. So Box 12 usually reports things like 401k, employer-provided health insurance, those types of things. And they're adding new codes to Box 12. There's going to be a Box 12 code 'TT' to report qualified overtime. There's going to be a box 'TP' to report qualified tips. So there are changes for the W-2 for 2026 to account for this. So there won't be as much confusion. I guess the question that I've been getting from clients on that is for 2026 and even for 2025, what support are we going to get from our payroll vendors and/or W-2 vendors on this? And I don't know, Mindy or John, if either of you have thoughts there.
Mindy: I know on my end, everybody is questioning their vendors at this point and trying to figure out, you know, what the vendors can provide. I think that companies are assuming that they're going to get a little bit of help from their vendors as to here's how you can get to this. I've heard that a couple of vendors do have the ability to pull the premium pay because their system does allocate the pay based on the time and a half. So some companies, I think, are ready to roll with this. I think the majority are not. Some companies are already getting questions from their employees on, you know, how are you going to get this to me and how do we get this information? So it's definitely a moving target right now. And John, I don't know if you've heard anything from your companies as well.
John: I agree. I think there's a big push towards the payroll providers to gather as much information as we can. And I think like everyone else, they're absorbing the new changes as well and working to provide as much data as they can to help employers through this, especially for 2025. And I think it's also kind of a wait-and-see mode at this point to see what can actually be provided.
Mindy: Well, and I know one area that I have still heard rejoicing far and wide though from all of this, and not from the overtime and the tips because there is no rejoicing, from the 1099 reporting. Companies are very happy that the threshold is actually increasing from $600 to $2,000. That does mitigate some work. It does not in any way compensate for all the work that's going to go on on the overtime and the tips part, but it does alleviate some stress on that end as well. So that's been a welcome change. So hopefully companies are making note of that, realizing that their thresholds have been increased, that now it's only $2,000 on a 1099.
John: Thanks, Manan and Mindy for walking us through all of these important changes. It's clear that the One Big Beautiful Bill Act has significant implications for employers across various sectors that we have to address in 2025 and 2026 as well.
Manan: That's right, John. Employers definitely need to stay on top of these changes and ensure compliance to make the most of these new opportunities for their employees.
Mindy: Yeah, and also, let's make sure that everybody's aware that we will be running these podcasts occasionally to keep everybody up to date. And we also produce all of this in our payroll insights every month. So definitely stay tuned and hopefully you can access both.
John: Great. Thank you for tuning in to this episode of Mobility Via Podcast. Join us next time for more insights on employment tax and related topics. Thanks for listening. Don't forget to subscribe to our podcast for more global mobility insights and updates.
