No Tax on Overtime

In compliance with the Federal One Big Beautiful Bill Act, this enhancement was implemented for the No Tax on Overtime new deduction in the current release of Payroll 2.26.0.

Effective for 2025 through 2028, eligible individuals who receive qualified overtime compensation may deduct the pay that exceeds their regular rate of pay (such as the 'half' portion of 'time-and-a-half' compensation) that is required by the Fair Labor Standards Act (FLSA) and reported on a Form W-2, Form 1099, or other specified statement furnished to the individual.

• The maximum annual deduction is $12,500 ($25,000 for Married taxpayers only if Filing Jointly).
• Deduction phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers).

 

Employers and other payors are required to file information returns with the IRS (or SSA) and furnish statements to taxpayers showing the total amount of qualified overtime compensation paid during the year. 

The IRS will provide transition relief for tax year 2025 for taxpayers claiming the deduction and for employers and other payors subject to the new reporting requirements.

The calculation for qualified non-taxable overtime wages = 0.5 of the regular rate times the hours worked (the half-time portion of a time and a half calculation).

This will be the amount that will be included in the W-2 Box 12, Code TT field for tax years 2026-2028. This tax break is a tax deduction taken at the time you file your taxes.

There are no changes to the tax calculations or withholding amounts on the employee’s pay check. If the employee anticipates getting extra money back, it’s up to the employee to change their W-4 accordingly.

The purpose of this enhancement is to provide an easier way for the user to separate out the 0.5 portion of the overtime, print that amount on the employee’s check and then populate the W-2 field during year-end processing starting in tax year 2026.

How to Configure Sage 100

• Install Payroll Product Update 2.26.0. See Knowledgebase Article Year-end Processing Resources for Calendar year 2025
• Existing Earnings Codes must include:
  • Earnings Type = Overtime
  • Pay Rate Multiplier = 1.500
  • DO NOT SELECT 'Apply to Box 14 on W-2' checkbox.  For Tax Years 2026 - 2028, the amount will appear in Box 12.
  • Tax Rule – Existing Tax rules are sufficient
  • Best Practice Tip is to set up new Overtime Earnings Code
  • FLSA Wages Eligible for No Tax on Overtime checkbox = Selected

 

NEW Overtime Earnings Code using New Tax Rule

• Recommended but not required