About the federal qualified overtime deduction The Federal Overtime Deduction became effective in 2025. The rule excludes federal income tax from the overtime premium—the difference between an employee’s regular rate and the 1.5× rate required by law. However, the entire wage for overtime hours isn't exempt. Components of the federal overtime deduction - Weekly threshold: The deduction applies only to hours worked beyond 40 in a single workweek.
- Qualified premium only: We deduct only the federally required extra half-time, not the full overtime pay.
 NOTE: If you pay daily overtime (after 8 hours each day), your payroll can show overtime that doesn't qualify for the federal deduction. This is expected behavior. Effect of the overtime deduction on W-2s For the tax year 2025, the amount of federal overtime compensation appears on employee W-2s in Box 14 with code OBBBTT. In later tax years, the amount appears in Box 12. Employees use their W-2s to figure out their allowed overtime deduction when filing taxes. Automatic tracking of qualifying hours after 2025 Starting in 2026 (version 27.3 and later), Sage 100 Contractor automatically tracks each employee’s federal overtime hours and qualified compensation. These amounts are displayed in each payroll record, with the need for a separate calculation.
NOTE: If your company pays daily overtime, only hours beyond 40 in the workweek contribute to the federal deduction. The W-2 reports only the qualified premium portion of those hours—the difference between the regular rate and the federally mandated 1.5 times rate. Example 1: Using Pay Type 2 - Overtime Employee payroll record: - Regular hourly rate: $20.00
- Overtime rate: $30.00 (time and a half)
- Qualified overtime rate: $30.00 (time and a half)
- Hours this week: 45
Calculation: - Overtime hours: 45 − 40 = 5 hours
- Qualified premium per hour: $30.00 − $20.00 = $10.00
- Qualified compensation: 5 × $10.00 = $50.00
Qualified overtime compensation reported on the W-2: $50. Example 2: Using Pay Type 3 - Premium Employee payroll record: - Regular hourly rate: $20.00
- Premium rate: $40.00 (double time)
- Qualified overtime rate: $30.00 (time and a half)
- Hours this week: 45
Calculation: - Overtime hours: 45 − 40 = 5 hours
- Qualified premium per hour: $30.00 − $20.00 = $10.00
- Qualified compensation: 5 × $10.00 = $50.00
Qualified overtime compensation reported on the W-2: $50. When Federal qualified overtime isn't correct Understanding when Federal qualified overtime calculations aren’t accurate |