The Royce CPA Firm

Certified Public Accountant specializing in personal, non-profit and forensic accounting and tax preparation

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No Tax on Overtime? New Reporting Rule Means You Still Have Work to Do

Contractors: Act Now.

With the new One Big Beautiful Bill Act (OBBBA), starting in 2025, your employees won’t have to pay federal income tax on their overtime wages. That’s great news for them.

But for you, the employer, it means new tracking and reporting requirements.

What Changed

  • Overtime wages are now exempt from federal income tax for employees.
  • Only the excess amount paid is tax-free. For example, if an employee earns $20/hour normally and $30/hour for overtime, only the extra $10/hour is tax-free.
  • You, the employer, must track and report overtime separately from regular wages on payroll reports and W-2s.
  • There is no change to payroll taxes – you still owe Social Security and Medicare tax on all wages, including overtime.

How Can You Comply?

Step 1: Confirm worker classification.

  • Do you have 1099 contractors who really function like employees? If so, fix this now. Misclassification could cause bigger problems under the new rules.

Step 2: Review who’s exempt from overtime.

  • Just because someone is salaried doesn’t mean they’re exempt. To qualify as exempt, employees must meet specific duties and salary tests. Evaluate these now before it’s too late.

Step 3: Check your time-tracking system.

  • You’ll need detailed overtime records, starting January 1, 2025.  Ask yourself: (1) can your system separate base pay from overtime? (2) can you access or recreate data retroactively if needed?

Step 4: Coordinate with your payroll provider and CPA.

  • Make sure your systems are aligned to properly report overtime wages to the IRS and avoid mistakes on W-2s.

Next Steps

RoyceCPA is offering an Overtime Analysis Service to help construction companies:

  • Correct misclassified workers
  • Evaluate exempt employees
  • Assess timekeeping and payroll readiness
  • Ensure compliance with the new W-2 reporting rules
  • Protect your business – and your employees – from IRS headaches.

 

This isn’t just a tax update – it’s a new layer of complexity for your back office. Let us help you get ahead of it.

Reach out to schedule your analysis.