Construction Contractors: New W-2 Overtime Reporting Obligations for 2025

The One Big Beautiful Bill Act (OBBBA) was signed into law on July 4, 2025. One of the provisions in the bill was a deduction on an individual’s personal tax return for “Qualified Overtime Compensation” (QOC). This deduction is capped at $12,500 ($25,000 married filing jointly) and is phased out when Modified Adjusted Gross Income is more than $150,000 ($300,000 married filing jointly).

Since overtime compensation is a regular occurrence in the construction industry, employers are now wondering what their obligations are related to reporting the information necessary to their employees for 2025 and beyond. As of the date of this article, several questions remain, but here is what we know so far:

Do employers really need to provide additional information to employees related to QOC for 2025?

Yes, Internal Revenue Code (IRC) Section 6051(a) was updated to include a requirement for employers to report QOC, generally on the W-2. This information needs to be provided to employees in order for them to have the necessary information available to prepare their individual income tax returns.

Do employers need to verify an employee’s eligibility for taking this deduction?

No, employers are under no obligation to determine whether an employee qualifies for this deduction or not. QOC still needs to be reported, even if the employer suspects the employee may not be eligible for the deduction (based on income levels or other factors).

What is QOC?

Under IRC Section 225(c), QOC is defined as “overtime compensation paid to an individual required under section 7 of the Fair Labor Standards Act of 1938 (FLSA) that is in excess of the regular rate…”  Therefore, QOC for purposes of this new deduction is only the overtime premium – in other words, QOC is only the “half” in “time-and-a-half”.  It is not the entire time-and-a-half.

The FLSA requires time-and-a-half pay for nonexempt employees who work more than 40 hours in a workweek. Under FLSA, this time-and-a-half pay is based on their regular rate, which may or may not be the same as their stated hourly rate. Before attempting to calculate QOC for W-2 reporting, employers should make sure they are calculating and paying the proper amount of overtime as required under FLSA. The Department of Labor website provides information related to regular rate of pay for FLSA overtime purposes.

What is NOT QOC?

QOC does not include overtime hours or compensation beyond FLSA requirements, such as:

• Double time or other overtime that an employer chooses to pay as a company policy
• Overtime mandated by state or local law
• Daily overtime rates specified by construction contracts
• Overtime mandated by a union contract

Remember, QOC is ONLY the “half” in “time-and-a-half” required under the FLSA! Anything else is not included in QOC reporting, even if the employee views other items as overtime compensation.

Does this affect FICA (Social Security/Medicare) or federal withholdings from paychecks?

No. As an employer, you should continue to withhold and pay the same FICA taxes as normal. The individual’s deduction for QOC does not have any effect on the amount of compensation subject to FICA. For 2025, there have been no changes to the federal tax withholding tables for QOC. However, an individual employee may provide an updated W-4 form at any time if they choose to do so.

What difficulties will be encountered when calculating QOC?

Time-consuming challenges will likely arise in the determination of QOC. These challenges may include separately identifying overtime hours paid for FLSA vs. other purposes, differing pay rates during the year or pay periods due to rate changes or doing prevailing wage jobs, and verifying that the correct regular rate of overtime was paid during the year. Since this deduction is allowed for all QOC during 2025, it may take time to go back to January 1, 2025 to calculate the proper amount of QOC to report for the year for each employee.

What are some examples of how this will work?

Example 1:

Wesley works 43 hours during a workweek, and his regular rate of pay is $30. He is paid $1,335 for the week ((40 hours x $30)+(3 hours x $45)). The QOC to report is $45 ($15 overtime premium per hour x 3 hours).

Example 2:

Assume the same facts above, except Wesley also receives a non-discretionary attendance bonus of $100. Under the FLSA, his regular rate is $32.33 per hour [((43 hours x $30) +$100))/ 43 hours)]. His total compensation for the week is $1,438.70, based on $32.33 per hour for 40 hours plus three hours at time-and-a-half. The QOC to report is $48.51 ($16.17 overtime premium per hour x 3 hours).

Example 3:

Assume the same facts above, except that Wesley’s $100 bonus was a fully discretionary bonus provided by management. In this scenario, the discretionary bonus is not included in his regular rate under the FLSA, so the QOC to report is the same as in Example 1 ($45), even though he got paid $1,435 total compensation for the week vs. $1,335 as in Example 1.

Example 4:

Tina works Monday through Thursday for 32 hours at $30 per hour. On Saturday, she works 8 hours, and her employer pays her double time ($60 per hour) for working Saturday as per their company policy. Her total compensation for the week is $1,440. Total QOC to report on her W-2 is $0, since Tina did not work more than 40 hours and there was no requirement under FLSA to pay time-and-a-half. While Tina believes she received $240 in overtime pay for the week ($30 Saturday premium x 8 hours), she will not be entitled to any deduction for overtime on her individual income tax return for this.

If we’re using an outside payroll company to process payroll and issue W-2’s, won’t the payroll company simply handle this for us?

For small companies who rarely pay overtime, and if all the overtime is FLSA time-and-a-half pay, the payroll companies might have what they need to add the QOC to the W-2’s. In most cases, however, there will likely need to be collaboration between you and your payroll company to calculate the proper amount of QOC to report on the W-2s, due to the situational challenges listed above. If you use an outsourced payroll company, communication should begin as soon as possible – you don’t want to wait until January to start asking questions!

What box on the W-2 should be used to report this QOC for 2025 and beyond?

For the 2026 tax year, the IRS has already provided a draft W-2 which shows the QOC being reported in Box 12 with a code TT.  However, for the 2025 tax year, the IRS has stated that there will be no changes to the 2025 W-2 (i.e., no specific code). Barring any further guidance from the IRS, the most common recommendation is to use Box 14 – Other, along with a description such as “Qualified OT” or something similar.

What guidance has been issued for 2025 at this point?

The OBBBA provides a transition rule for 2025 that says employers “may approximate a separate accounting of amounts designated as qualified overtime compensation by any reasonable method specified by the Secretary.”  In August of 2025, the IRS stated that the Treasury Department and the IRS are preparing additional guidance for both reporting entities and individual taxpayers. On October 17, 2025, the American Institute of Certified Public Accountants issued a letter to the IRS and the Department of the Treasury requesting clarification, safe harbor calculation methods, and examples to assist with 2025 reporting.

Time will tell regarding how much further guidance is issued for 2025, but the year-end is quickly approaching. We recommend getting started on determining your QOC as soon as possible. We will continue to monitor developments in this area and will communicate any changes as they arise!

Left with questions regarding QOC? Reach out to a Wegner CPAs construction advisor to help you navigate this and other changes related to recent changes in tax law.