New SALT Limit

[TaxGuyBill]

how is Sally SmallBusinessOwner going to know what to report on the W-2?

I'm interested in if Sally VERYSmallBusinessOwner will realize that she is not subject to the Fair Labor Standards Act , and therefore this doesn't apply. And/or when she find out that because she isn't subject to the Fair Labor Standards Act, she stops paying time-and-a-half for over 40 hours a week (although subject to state laws).

I have one client that falls into this. His business is only in operation for an EXTREMELY short time each year, so his business income and actions are not subject to the Fair Labor Standards Act. During that very short business time, his employees work well over 40 hours a week. The employees are not going to be happy when they find out their overtime is still fully taxable.

[Anarchrist]

it is necessary for the employer to calculate the “regular rate” as defined in 207(e) and then divide by 40.

Why would you do that? Nowhere does the law say to take the regular rate and divide it by 40. The only reason one would think that is if they believe that the regular rate is weekly and not hourly.

Even if you believe regular means weekly, there's still no reason to divide by 40 because the law says "regular rate" not "regular rate divided by 40". I have clients who are paid a monthly salary. Should I take their regular rate of $5,000/month and divide it by 40? Union contracts specifically state an hourly rate, not a weekly rate. Do I divide that hourly regular rate as clearly defined by the contract and divide it by 40?

That subsection says for example “regular rate” would not include extra money for working on a Sunday.

What it exactly says is:
(6) extra compensation provided by a premium rate paid for work by the employee on Saturdays, Sundays, holidays, or regular days of rest, or on the sixth or seventh day of the workweek, where such premium rate is not less than one and one-half times the rate established in good faith for like work performed in nonovertime hours on other days; (https://codes.findlaw.com/us/title-2...-usc-sect-207/)

And the regular rate to determine the premium rate is hourly, not weekly.

So if the TP has $800 in total remuneration (regular rate as defined)

Where is the regular rate defined that way?

then his/her regular rate of pay is $20 per hour

Exactly, his regular rate is $20/hour, not $800/wk.

TP works 5 hours of OT for a total of $150. What’s the excess of remuneration over the regular rate as defined? Still seems like $150.

Not only does it still seem like $50, the law still defines it as $50.

https://www.congress.gov/bill/119th-con ... ill/1/text
(c) Qualified Overtime Compensation.--
(1) In general.--For purposes of this section, the term `qualified overtime compensation' means overtime compensation paid to an individual required under section 7 of the Fair Labor Standards Act of 1938 that is in excess of the regular rate (as used in such section) at which such individual is employed.

https://codes.findlaw.com/us/title-29-l ... -sect-207/
shall not be deemed to include--
(5) extra compensation provided by a premium rate paid for certain hours worked by the employee in any day or workweek because such hours are hours worked in excess of eight in a day or in excess of the maximum workweek applicable to such employee under subsection (a) or in excess of the employee's normal working hours or regular working hours, as the case may be;
(6) extra compensation provided by a premium rate . . .
(7) extra compensation provided by a premium rate . . .

"Extra compensation provided by a premium rate" is the 50% premium of OT pay, not the full $150% OT rate.

[New York Enrolled Agent]

Why would you do that? Nowhere does the law say to take the regular rate and divide it by 40. The only reason one would think that is if they believe that the regular rate is weekly and not hourly.

Even if you believe regular means weekly, there's still no reason to divide by 40 because the law says "regular rate" not "regular rate divided by 40". I have clients who are paid a monthly salary. Should I take their regular rate of $5,000/month and divide it by 40?

U.S. Department of Labor Fact Sheet 56A [note the FS uses the division symbol but it didn't produce on TB site - I replaced symbol by divided by]

The formula to compute the regular rate is:

Total compensation in the workweek (except for statutory exclusions) divided by Total hours worked in the workweek = Regular Rate for the workweek

[spanel]

Jumping on this late...

Overtime calculations...

Why would we change anything on the W2? All income reports normal/ot/tips/etc.

Then we reference a yearend paystub for the "overtime" line and use that number as a deduction on the 1040.

Chris

[spanel]

Do we know the professions excluded from OT / Tips?

Chris

[kathyc2]

Jumping on this late...

Overtime calculations...

Why would we change anything on the W2? All income reports normal/ot/tips/etc.

Then we reference a yearend paystub for the "overtime" line and use that number as a deduction on the 1040.

Chris

Well, it's required to be reported as a line item on W-2. First year has: (h) Transition rule.—In the case of qualified overtime compensation required to be reported for periods before January 1, 2026, persons required to file returns or statements under section 6051(a)(19), 6041(a), or 6041(d)(4) of the Internal Revenue Code of 1986 (as amended by this section) may approximate a separate accounting of amounts designated as qualified overtime compensation by any reasonable method specified by the Secretary.

Hopefully the payroll companies will get it right, but I have my doubts about those using PayChex.

Small companies that prepare payroll and W-2's in house may have some that report the full overtime pay on W2 rather than just the premium, assuming the premium is what ends up being a deduction.

Even worse, is the law prescribes withholding be adjusted beginning in 2026 to account for the OT.

[rbynaker]

Kathy and others - I'm coming back to my post from yesterday regarding the OT pay. - I've been struggling with this. Someone posted a similar example on a different board and that made me look again and I now think the $150 is fully excludable.

I believe the problem arises with the "regular rate". At first glance it seems to cover the $20/hour (regular hourly pay) in my example. But I think "regular rate" needs to be viewed based on the Fair Labor Act, section 7. In that section, subsection 207(e) defines regular rate. If I read it correctly, the regular rate in my example would be $800 (40 hours times $20). Thus, the OT pay to be excluded would be $150.

Obviously, I may be interpreting incorrectly but take a look at the definition and see what you think. This is only a snip from 207(e) - a snip can be dangerous so maybe look at the whole thing. BTW, 207(a) defines overtime to be in excess of 40 hours.

(e) “Regular rate” defined
As used in this section the “regular rate” at which an employee is employed shall be deemed to include all remuneration for employment paid to, or on behalf of, the employee, but shall not be deemed to include—

Someone in another group shared a PDF from a NATP CPE today. The NATP example on overtime agrees with your interpretation.

Example: Maria is a restaurant shift supervisor earning $20/hour. In 2026, she works 250 hours of overtime at time-and-a-half.

• Regular rate: $20/hour
• Overtime pay: $30/hour x 250 hours = $7,500
• Maria’s AGI is $90,000
• Maria includes all relevant info on her tax return, including her SSN

Maria can deduct $7,500 from her taxable income under this section.

I'm still not sure I agree with this interpretation but you're certainly not alone in reaching this conclusion! We'll see if the IRS comes out with regulations providing examples.

[New York Enrolled Agent]

Thanks Rick - the worst part is I think I'm changing my mind on this. LOL

In any case, we all see the need for IRS guidance.

[rbynaker]

Thanks Rick - the worst part is I think I'm changing my mind on this. LOL

In any case, we all see the need for IRS guidance.

I feel your pain, my friend.

IMO when Congress referred this code section to existing law (outside of Title 26) it turns this into a labor law question rather than a tax question. I'm not sure I'm qualified to prepare W-2s anymore, employers with overtime pay may need to consult an attorney! (But for some context I was squarely in the camp that BOI was also beyond my authority to prepare.)

[Anarchrist]

Someone in another group shared a PDF from a NATP CPE today. The NATP example on overtime agrees with your interpretation.

I read through that PDF earlier today and was going to post that same quote at TaxProTalk, but the conversation there on OBBB has now hit 4 pages and the overtime issue hasn't been brought up in the past 30 comments. So I figured I'd just let sleeping dogs lie. Two or three summaries I read earlier stated "just the 50%" portion. Now NATP is saying the full amount. The fact that so much discussion and disagreement have occurred indicates congress once again has no idea what they passed.

On a superficial level, "no tax on overtime" clearly means no tax on the whole amount. Payroll programs already calculate that and display it on the paystub. It also wouldn't be that difficult add something on the W2 to show it. However, if the irs guidance says it's just the 50% extra, do you think many payroll providers/programs will say, "we don't have time to reprogram our computers to calculate that" and not show it on the W2, thus causing most eligible for the deduction to become not eligible?

[rbynaker]

Huh, looks like the site got a facelift this morning! Not terrible but it'll take a little getting used to. Most things seem a little bigger, which means more scrolling but overall more aesthetically pleasing.

Getting back to Overtime, I haven't been able to try to determine Congressional Intent in order to figure out which interpretation might be correct. But someone posted on TaxProTalk that the White House website has a calculator and it's only using the overtime premium (i.e. the 50% extra) in the calculation. So that makes Executive Intent pretty clear. ;-)

https://www.whitehouse.gov/obbb/

Scroll down about halfway to find: "NOTE: only include the overtime premium amount. i.e. If your pay is $20/hour, and overtime gives you an extra $10/hour, that extra $10 is the premium."

Rick