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December 3, 2025

Important: New “No-Tax Overtime” Provision under One Big Beautiful Bill Act

The words "Tax Time", with a background of logos of Office of the Comptroller and the Internal Revenue Service

To: All CFOs and Payroll Directors

From: Tryntje Bumgardner, Assistant Comptroller, Payroll & Payments

As you are hopefully aware, the One Big Beautiful Bill Act (OBBBA) includes new federal tax provisions related to overtime compensation. Beginning with Tax Year 2025, employers are required to report the total amount of “qualified overtime compensation” – the Fair Labor Standards Act (FLSA)-required overtime premium portion paid to nonexempt employees – on employees’ annual wage statements.

The Office of the Comptroller, the Tax Clearinghouse for the Commonwealth of Massachusetts, will manage all required data collection, calculation, and reporting. This information outlines what departments can expect and what information employees will receive.

1. Reporting on Federal Form W-2

Departments will not need to perform any additional reporting but may be asked to provide separate communications to employees and support for employee questions regarding the amount reported on their Form W-2.

2. Employee Communications

The CTR Statewide Payroll Team will issue statewide communication to all employees prior to the distribution of 2025 Forms W-2 through an announcement on HR/CMS Employee Self-Service and posted at macomptroller.org/wp-content/uploads/memo_2025-12-03_obbba.pdf. This communication will explain:

Departments will not need to issue independent FAQs. FAQs are below.

3. Department Responsibilities

To support consistent statewide reporting, departments are asked to:

4. Next Steps

If additional federal or IRS guidance is issued, we will update processes and provide further instructions.

Please share this information within your department’s payroll and HR units. If you have questions, contact the Statewide Payroll Team at [email protected].

Thank you for your collaboration as we implement this new reporting requirement.

Frequently Asked Questions: General Information

1. What is the OBBBA and why does it affect overtime reporting?

The One Big Beautiful Bill Act (OBBBA) created a new federal tax deduction for certain overtime earnings. To support this deduction, employers must report the amount of “qualified overtime compensation” paid to employees each year.

“Qualified overtime compensation” refers specifically to the FLSA-required overtime premium – not all overtime pay.

2. What is “qualified overtime compensation”?

It includes only the premium portion of overtime pay (the extra half-time paid above the regular hourly rate) that is required under the Fair Labor Standards Act (FLSA).

Examples:

  • Time-and-a-half for hours worked over 40 in a workweek for nonexempt employees.
  • For a $20/hour employee the $10 overtime premium (the half-time portion of the $30 OT rate) is the “qualified” amount.

It does not include:

  • Daily overtime required only by state law (e.g., California daily OT rules).
  • Voluntary, contractual, or agency-specific premium rates not required by FLSA.
  • Straight-time earnings or full overtime dollars – only the premium amount qualifies.

3. Is the overtime tax-free?

Not entirely. The deduction applies only to federal income tax, and only when an employee claims it on their tax return. All other taxes still apply:

  • Social Security (where applicable)
  • Medicare
  • State income tax
  • Local taxes

Frequently Asked Questions: Information for Employees

4. How will this information appear on my Form W-2?

Beginning with Tax Year 2025, your Form W-2 will include a separate code OT in Box 14 showing your total qualified overtime compensation for the year. This amount will help you determine whether you can take the new federal deduction.

5. Do I have to do anything to get the benefit?

Yes. You must claim the deduction when filing your federal income tax return. It is not automatic. The deduction:

  • Is capped annually (e.g., $12,500 for single filers; $25,000 for married filing jointly under current law).
  • Phase out for higher-income taxpayers.
  • Depends on your eligibility and filing status.

6. Will this change how I am paid?

No. Your overtime pay will continue to be calculated and paid exactly as it is today. The only change is in how it is reported for tax purposes.

7. Who can answer employee questions?

Your department should be able to respond to any questions which you have regarding this new tax reporting.

Frequently Asked Questions: Information for Departments

8. Will departments need to calculate or report qualified overtime?

No. The Statewide Payroll Team in the Office of the Comptroller will:

  • Calculate qualified overtime based on FLSA rules.
  • Report the annual amount on each employee’s Form W-2.
  • Apply a “reasonable method” for calendar year 2025 per federal transition rules.

Departments do not need to perform their own calculations.

9. What are department responsibilities?

Departments must ensure:

  • Accurate time reporting of hours worked.
  • Correct designation of FLSA exemption status.
  • Proper work schedules for overtime eligibility.
  • Timely and accurate approval of overtime hours.

10. How will the Statewide Payroll Team calculate qualified overtime?

The payroll team will:

  1. Identify all overtime hours paid at 1.5x or other FLSA-required premiums.
  2. Distinguish the premium (half-time) portion from the base, regular-rate pay.
  3. Aggregate and store that amount for annual reporting

This process follows FLSA rules for determining:

  • Regular rate
  • Premium pay
  • What constitutes compensable overtime under federal law

11. What will not be included in the reported amount?

Excluded categories include:

  • Daily overtime required only by state law
  • Contractual or agency-specific premiums (e.g., double time, shift premiums) not mandated by FLSA
  • Any overtime for exempt employees (since FLSA does not require it)

12. Will payroll directors receive system guidance?

Yes. A memo will be distributed that explains:

  • How the payroll system calculates the qualified overtime premium
  • How to review the calculated amounts

13. How should payroll staff respond to employee questions?

Payroll staff may:

  • Explain what qualified overtime is
  • Explain how it will be displayed on the Form W-2
  • Refer employees to these FAQs

Payroll staff must not provide personal tax advice.

14. What should departments do if they identify incorrect FLSA designation or overtime entries?

Departments should correct the data as soon as possible following standard procedures. Accurate exemption status and time reporting are essential to proper OBBBA reporting.

Frequently Asked Questions: Additional Information

15. When does this reporting begin?

Reporting begins with Tax Year 2025 (Forms W-2 distributed in January 2026).

16. Is this requirement permanent?

Under current law:

  • The deduction and reporting requirement apply 2025 through 2028.
  • Congress may extend or modify the provision.

17. Who will send statewide communications?

The Office of the Comptroller Statewide Payroll Team will issue:

  • Employee notifications
  • FAQ documents
  • System guidance for payroll staff