IRS Revolving Door: Ongoing Tax Breaks Amid Rapid Employee Transitions
In a significant shift for tax season 2025, employers are now required to identify qualifying overtime pay separately on Form W-2 to allow employees to claim a federal income tax deduction on those amounts.
Timothy McPhee, a Colorado man, recently pleaded guilty to promoting an illegal tax shelter, highlighting the importance of compliance with tax laws. With the new law effective from January 1, 2025, eligible employees can deduct up to $12,500 (or $25,000 for married filing jointly) of qualifying overtime pay from their federal taxable income.
To enable this deduction, employers must specially track and report overtime pay separately on Form W-2. Key implications for this new reporting requirement include:
- Separate reporting of qualifying overtime pay: Employers are required to specify the amount of qualifying overtime compensation on each employee’s W-2. This new reporting line will help employees claim the deduction when filing taxes.
- Approximate reporting allowed for 2025: For the first year, employers may “approximate” the qualified overtime amounts on the W-2 by using any reasonable method approved by the IRS, helping ease the reporting burden during the transition.
- W-2 Changes: Although the exact box placement on the W-2 is pending IRS guidance, employers will likely use a designated box such as Box 14 to report overtime pay separately from regular wages.
- Overtime pay remains subject to withholding and payroll taxes: Despite the deduction, overtime wages are still subject to federal income tax withholding (with IRS updating withholding procedures), Social Security, Medicare, and state/local taxes. The deduction applies when filing the tax return, not at withholding time.
- Record-keeping and compliance: Employers must maintain accurate records and update payroll systems to ensure compliance with the new overtime tracking and reporting rules. Consulting tax or employment counsel is advised before making changes.
The IRS is expected to provide further detailed guidance and updated forms in 2025. As the tax season approaches, it's crucial for employers to stay informed and prepared to comply with these changes.
Meanwhile, the IRS workforce has reduced from 103,000 employees in January 2025 to approximately 77,000 in May 2025. This reduction, combined with the new reporting requirements, underscores the importance of clear and accurate record-keeping for both employers and employees.
In other news, the IRS has published Internal Revenue Bulletin 2025-33, and a Pennsylvania proposal has moved to the Senate, which would update state law to explicitly exempt privately-owned campgrounds from local amusement and admission taxes.
References:
[1] IRS.gov - Publication 15 (Circular E), Employer's Tax Guide (2025) [2] IRS.gov - News Release IR-2024-212 (October 2024) [3] AICPA.org - Letter to the Honorable Janet Yellen (October 2024) [4] CCH Tax Daily (October 2024) [5] Journal of Accountancy (October 2024)
- The new changes in tax season 2025 may provide some tax breaks for employees who receive qualifying overtime pay, but they should be aware that these amounts will still be subject to withholding and payroll taxes.
- The reduction in the IRS workforce and the new requirements for reporting overtime pay separately on Form W-2 highlight the importance of proper record-keeping and compliance for both employers and employees in the business world, as well as understanding finance-related tax trivia like the One Big Beautiful Bill Act or 529 plans.
