New IRS Overtime Rules: What Restaurants Should Know
The IRS has updated its guidance for qualified overtime compensation, requiring employers to separately track and report each employee's overtime compensation eligibility on the W-2 form.
As tax season approaches, restaurants must be aware of the new IRS overtime rules that have taken effect. The rules, which were introduced as part of the One Big Beautiful Bill Act in July 2025, require employers to include eligible overtime on workers' W-2 forms.
Before 2025, overtime pay was not eligible for a special tax deduction, and employers reported all wages as a single amount on W-2 forms. However, with the passage of the One Big Beautiful Bill Act, new qualified overtime compensation deductions of up to $12,500 for single filers or $25,000 for married couples were created. Deduction benefits phase out starting at $150,000 annual income for single filers or $300,000 for married couples.
Employers must now separately track and report each employee's overtime compensation eligibility on the W-2 form. Failure to do so will result in financial penalties, ranging from $60 to $660 per W-2 form, depending on timing and business size.
Qualified overtime is defined as hourly employees working beyond the standard 40 hours per week, and only the premium portion counts (i.e. the half in time-and-a-half).
For the restaurant industry, these rules will significantly change how employers operate during tax season, as restaurants employ significant numbers of overtime-eligible hourly employees.
Employers should update their payroll systems, understand what constitutes qualified overtime under the new rules, and report all overtime comprehensively, even if employees are unable to deduct it all.
### Understanding Qualified Overtime
Qualified overtime is defined as hourly employees working beyond the standard 40 hours per week. Only the premium portion of overtime pay counts, which is the half in time-and-a-half.
### Reporting Overtime on W-2 Forms
Employers must now separately track and report each employee's overtime compensation eligibility on the W-2 form. Failure to do so will result in financial penalties.
### Penalties for Non-Compliance
The penalties for non-compliance with the new overtime rules are as follows:
| Penalty | Description | | --- | --- | | $60 | Per W-2 form, for timely compliance | | $660 | Per W-2 form, for late compliance |
Employers should take immediate action to update their payroll systems and ensure compliance with the new overtime rules to avoid financial penalties.
Contact Joanna at [email protected] for more information.
