NAVIGATING THE OVERTIME TAX CHANGES OF 2025: WHAT SECURITY PROFESSIONALS NEED TO KNOW
Nina De Forge, TEAM Software by WorkWave, CALSAGA Network Partner
Important Disclaimer: This article is for informational purposes only and is not legal or tax advice or a political opinion. Consult with internal and/or external counsel, as well as a qualified tax professional, for guidance specific to your business and employees.
The security industry frequently depends on dedicated employees working beyond standard hours to meet client demands. Whether it’s handling emergency security situations, overtime is often an operational necessity rather than an option. Upcoming changes to federal tax law regarding overtime compensation are on the horizon and may affect both your employees and your business operations.
Why Overtime Changes Matter for Your Industry
On July 4, 2025, Public Law No. 119-21, known as “The One Big Beautiful Bill Act” (OBBBA), was enacted, which finalized significant tax cuts and reforms. Starting in tax year 2025, a new federal tax deduction allows certain employees to deduct the “premium portion” of their overtime compensation—the extra amount they earn above their regular hourly rate.
How These Overtime Changes May Impact Your Employees
Consider a security guard earning $20/hour who works overtime at $30/hour. The additional $10/hour premium can now be deducted from their federal taxable income. However, there are important limitations:
- Deduction Caps: Capped at $12,500 per year ($25,000 for married couples filing jointly).
- Income Limits: Phased out when modified adjusted gross income exceeds $150,000 ($300,000 for married couples filing jointly).
- Tax Type: Applies only to federal income tax; Social Security and Medicare taxes (FICA) still apply.
- Overtime Type Restrictions: Only overtime required under Section 7 of the Fair Labor Standards Act (FLSA) Overtime mandated by state laws, union contracts, or voluntary company policies will not qualify.
How These Overtime Changes May Impact Your Business
Employers will need to make significant adjustments to their payroll and reporting processes.
New Reporting Requirements for Tax Year 2025: Employers must be able to demonstrate a good faith effort in reporting qualified overtime, in cases where qualified overtime was not captured in their system for 2025. They can use “Box 14 Other” for reporting qualified overtime for tax year 2025 pending additional guidance.
New Reporting Requirements for Tax Year 2026: Employers must be able to accurately report qualified overtime, required in Box 12 and identified in their current W2. You must use ‘TT’ – total amount of qualified overtime compensation – when determining the deduction for qualified overtime compensation on Schedule 1-A (Form 1040).
Operational Adjustments: For security operations that rely heavily on overtime, this represents a substantial change to existing payroll processes.
Your ERP’s Role in Supporting Your Success
As a payroll and workforce management partner, leading ERP’s – like TEAM Software by WorkWave’s WinTeam, are ensuring your systems can seamlessly adapt to these new requirements while maintaining reliability.
Best-of-breed ERPs should be actively engaged with industry organizations and monitoring regulatory developments to ensure updates to their solution continue to support your compliance efforts.
Key Areas of Focus for Your Business
Key areas that may require attention include:
- System Assessment: Review your payroll system’s ability to separate and track overtime premium amounts. Systems must be able to distinguish between the base overtime rate and the premium portion for W-2 reporting.
- Process Documentation: Document how overtime premiums will be calculated, tracked, and reported, distinguishing FLSA-required overtime from other forms.
- Testing and Validation: Test your systems to ensure accurate calculation and reporting.
- Timeline Planning: Develop a preparation timeline that ensures adequate system updates, staff training, and process validation before the requirements take effect.
Interested to see how WinTeam’s in-house payroll system can efficiently manage these complex requirements? Reach out to us for more information.
Important Disclaimer: This article is for informational purposes only and is not legal or tax advice or a political opinion. Consult with internal and/or external counsel, as well as a qualified tax professional, for guidance specific to your business and employees.
Nina De Forge joined the team in 2017 and is the Agency Relations Manager. Nina, also known as “9,” has been working with human resources, payroll and tax compliance since the 1980s and has a broad range of experience across each discipline. She is an active member of many industry organizations, including the IRS Information Reporting Advisory Committee and its Nationwide E-Filer’s National Focus Group, the Canadian Payroll Association, the Society for Human Resource Management and the International Association for Human Resource Information Management. She is a published author in the book American Payroll Association Basic Guide to Payroll. Outside of her career work, Nina is a hobby photographer.