As we reported in our Legislative Update last year, the federal government passed a law in 2025 with changes to the tax code that will allow employees to deduct “qualified overtime compensation” on their federal income taxes, up to certain amounts, and subject to specified caps on adjusted gross income. The IRS recently issued a new Fact Sheet with answers to frequently asked questions about the deduction, which can be accessed here. This law imposes new requirements on employers to track and report “qualified overtime compensation.”

California employers should know that “qualified overtime compensation” has a specific definition under the new tax law. Specifically:

• “Qualified overtime compensation” means just the overtime premium (i.e., ½ the regular rate of pay for each overtime hour, not including the underlying hourly rate); and
• “Qualified overtime compensation” only relates to overtime as it is defined under federal law – that is, ½ the regular rate for hours worked in excess of 40 hours per week, not California overtime for hours worked in excess of 8 hours per day (or additional overtime provided according to an employer policy or collective bargaining agreement).
  • For example, if an employee worked 9 hours each workday for five days in a workweek, for a total of 45 hours, the employee would be entitled to 5 hours of overtime pay. Since the employee worked 45 hours in the week, all 5 of these hours would constitute overtime under federal law, and the employee’s “qualified overtime compensation” would be five times ½ of the regular rate of pay.
  • However, if a California employee worked 12 hours in one workday and 6 hours on each of four additional days in the week, for a total of 36 hours, the employee would be entitled to 4 hours of overtime pay under California law, but they would not have any “qualified overtime compensation,” because they did not work more than 40 hours in the workweek.

Thus, “qualified overtime compensation” for purposes of the tax deduction will likely be different from the total of all “overtime” reported on California employees’ wage statements, and California employers will need to take steps to identify the portion of all “overtime” that constitutes “qualified overtime compensation.”

Starting with the 2026 tax year, employers must include the amount of “qualified overtime compensation” on employees’ W-2 forms. However, this new federal law does not change the requirements for California wage statements.

Employers are encouraged to consult with their tax advisors and payroll providers to ensure they can accurately track and separately report “qualified overtime compensation” in accordance with the new requirements. In addition, employers should ensure they are properly calculating the regular rate of pay for purposes of paying all overtime compensation and for purposes of properly quantifying “qualified overtime compensation.” Finally, employers may wish to watch for any new regulations or guidance from the Treasury Department, which may provide additional information in advance of the 2026 tax season.

If you have questions about how this new law will affect your business or advice about how to implement these new requirements, please contact us.

• Katie M. McCray (kmccray@wilsonturnerkosmo.com)
• Mary P. Snyder (msnyder@wilsonturnerkosmo.com)

Wilson Turner Kosmo’s Special Alerts are intended to update our valued clients on significant employment law developments as they occur. This should not be considered legal advice.