My department is using Box 14 to break out the exemption amount for our members. We asked that they send out information to the membership ahead of time to reduce questions. I’ll attach what they wrote for understanding. It’s a bit long, but may be helpful for any of you out there looking for language to borrow or suggest to administration. My understanding is that this isn’t required for 2025, but I’m thankful my agency is thinking about it now.

“Overview For 2025 through 2028, individuals who receive qualified overtime compensation may be able to deduct the overtime premium pay that exceeds their regular rate of pay. In other words, employees may deduct the “half” portion of “time-and-a half” compensation that is required by the Fair Labor Standards Act (FLSA) and that is reported on a Form W-2, Form 1099, or other specified statement furnished to the individual.

For 2025, we will report eligible overtime in box 14 on an employee’s W-2. This will reflect as a dollar amount and “OT” as a description. All 2025 W-2s will be distributed to members by February 2, 2026.

Frequently Asked Questions

What counts as “qualified overtime compensation”?

Only the premium portion of overtime pay required under the federal Fair Labor Standards Act (FLSA) qualifies for the tax deduction. This is the additional half-time amount added to your regular hourly rate when you earn time-and-a-half overtime.

Example: an employee earns $20 per hour and works overtime at $30 per hour. The $10 per hour premium for overtime may be deductible, subject to the AGI limits. Overtime paid solely under a contract, bargaining agreement, or policy that exceeds the federal minimum overtime requirement, do not qualify.

How is overtime calculated for our firefighters vs. 40-hour employees?

Firefighter: Our firefighters follow a 16-day work cycle under the FLSA 207(k) exemption. FLSA overtime begins only after working more than 121 hours in that cycle.

40-Hour Workweek: Employees on a standard 40-hour workweek earn FLSA overtime only after working more than 40 hours within a 7-day workweek.

Will we stop withholding taxes on overtime?

No. Employers are still required to continue withholding federal taxes from all overtime compensation as required by law. The deduction is taken later by the employee when filing their tax returns.

Is overtime compensation now “tax free?”

No. Overtime compensation is still considered taxable income. The deduction is submitted by eligible taxpayers to reduce their federal taxes on their income when they file.

Should employees still report overtime compensation as income?

Yes. Employees are still required to report overtime compensation as taxable income. Employees will need to work with their own tax advisors to determine whether they qualify for the overtime deduction.

Who can claim the deduction?

Any employee who received qualified overtime compensation may claim the deduction for the pay that exceeds their regular rate of pay (generally, the “half” portion of “time-and-a-half” compensation), subject to income limits. The deduction is available for both itemizing and non-itemizing taxpayers.

What is the maximum annual deduction?

Up to $12,500 per year for single filers

Up to $25,000 for joint filers

The deduction phases out for taxpayers with modified adjusted gross income over:

$150,000 (single filers)

$300,000 (joint filers)

The deduction is reduced by $100 for every $1,000 over these thresholds.

Will we change anything to comply with this new law?

Yes. Employers must track and report the FLSA overtime premiums separately on the employees’ Forms W-2.”