Employers, Workers Prep for Overtime Tax Break Without IRS Input

President Donald Trump’s campaign promise of a tax break on overtime enjoys wide support, but implementation has been a slow roll and is spurring confusion for businesses and workers ahead of next year’s filing season.

The GOP tax law lets certain workers deduct up to $12,500 on the “half” of the “time-and-a-half” of federal overtime income this year through 2028, though the tax break doesn’t apply to Social Security and Medicare taxes.

Workers from firefighters to those in manufacturing will need to sort out that “half” of each hour of eligible overtime, and look backward to the start of the year. Businesses need instructions to calculate overtime in 2025. Both await guidance from the Treasury Department and IRS on what to do next, which could come any day.

“It really all comes down to education both for the employer in what they need to report, and to employees on what they should be reporting,” said Curtis Tatum, senior director of legal and compliance at PayrollOrg, whose members do payroll or work with a processor.

Further complicating the guidance rollout is a lack of manpower at the IRS, gashed under Trump administration initiatives to slash the federal workforce. Add to that the government shutdown, which furloughed nearly half of all IRS employees.

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Payroll processors say they don’t expect employers to need new payroll systems, though employers will likely need to report new kinds of data.

“It’s going to be changes to how they’re reporting information to us,” Dan Lewis, the vice president of compliance programs and government affairs at ADP.

In 2026, payroll systems will need to be programmed to track the relevant income so it can be reported. During an October call with the payroll industry, the IRS said employers may report qualified overtime for 2025 in Box 14 of the 2025 W-2, Tatum said.

The National Association of Manufacturers has asked Treasury to keep the compliance burden low.

“They’re excited about this provision for their employees, but they don’t want to have the unintended consequence of having to change how they do payroll writ-large,” said Charles Crain, NAM managing vice president of policy.

The IRS already updated a draft of the 1040 form for next year’s filing season, including spots for the overtime deduction, the break for tipped wages, and car loan interest.

Transition rules are important because they give “a little bit of flexibility for workers and employers,” said Andrew Lautz, director of tax policy for the Bipartisan Policy Center. “On the flip side, it does mean that people may claim the overtime deduction with less paperwork, less substantiation in 2025, that they will in future years.”

Those Left Out

Not everyone can benefit from the break. The tax law utilizes the Fair Labor Standards Act definition of overtime, which excludes railroad and certain highly compensated workers, and when overtime kicks in it isn’t uniform for all workers.

For example, the law states police and firefighters must work what averages out to be about 43 and 53 hours, respectively, before they begin earning overtime.

Though some firefighter unions collectively bargained with departments to begin earning overtime at a lower number of hours, the overtime tax break won’t kick in for most firefighters until 53 hours, said Evan Davis, government affairs director for the International Association of Fire Fighters.

A bipartisan group of lawmakers including Rep. Nicole Malliotakis (R-N.Y.) proposed a tweak to the law that would expand the overtime provision to rail and airline workers, and recognize overtime as it is defined by collective bargaining agreements.

“By lightening the tax burden on overtime pay, we’re rewarding the extra hours and hard work that so many families depend on,” Malliotakis said in a statement announcing the legislation.

Though the law is relatively clear on worker eligibility, the union still hopes guidance may give some relief to firefighters. And, if not, they’re hoping the Malliotakis bill would be included in a year-end tax bill, if one were to materialize.

“We’ve had a number of conversations with both Republican and Democratic offices, both House and Senate. We’ve not had anyone oppose this,” Davis said. “We’re optimistic that it’s just a matter of finding the right vehicle.”