Impact of the No Tax on Overtime provision to QuickBooks Payroll

John is paid $20 per hour and worked 40 regular hours and 5 hours of overtime this week. He is paid 1.5 X his regular rate for overtime. To determine the amount of “Qualified Overtime”:

Step 1: Determine the overtime rate: $20 * 1.5 = $30.00

Step 2: Determine John’s regular overtime pay: 5 * $30.00 = $150.00

Step 3: Determine the rate that equals the “half” of "time and a half": $30.00/3 or $10.00

Step 4: Calculate the "Qualified Overtime” amount = $10.00 * 5 overtime hours = $50.00

Add the new “Qualified Overtime Tracking” pay type to each employee who's subject to Overtime rules.  For new employees added, we'll automatically include the Qualified Overtime Tracking item when Overtime Pay is added to an employee.

Follow the steps in Add or change pay types, to create a new payroll item. Choose “Qualified Overtime Tracking” from the list of available pay types.

• Because this is a tracking item only, it won't appear within your chart of accounts.

What to expect

If you only use QuickBooks’ embedded Overtime 1.5x and Double Time pay types: 

• We assume that all overtime paid is in line with FLSA standards. We'll automatically enter the qualified amount into the new tracking item when you run payroll.  You may edit this amount at any time when running payroll or by editing a paycheck after it's been created.
  

If you have company overtime policies or state laws that differ from the Fair Labor Standards Act:

• If you use our embedded overtime pay types, we'll still populate a Qualified Overtime Tracking amount during run payroll. You'll need to manually calculate the correct amount based solely on FLSA guidelines and edit the amount we have pre-populated.  You may edit the amount when running payroll or by editing a paycheck after it's been created.

If you use pay types other than our embedded overtime or double overtime items: 

• The new Qualified Overtime Tracking item won't automatically show up on your employees.  To manually add this tracking item:

Be sure you have installed all current QuickBooks and Tax Table updates. 

When you first run payroll or access Payroll Setup, a wizard will appear to help step you through adding the Qualified Overtime Tracking payroll item.  

If the wizard doesn't appear, you will need to manually add the tracking item.  Follow the steps in Set up and manage company contributions, to create a company contribution payroll item and choose the tax tracking type of Qualified Overtime Tracking.

• Because this is a tracking item only, we recommend that you select the same chart of accounts account on the Agency for company-paid liability screen so that the impact to your chart of accounts is 0.  For example, choose the Payroll Liabilities account in both the Liability account and Expense account sections.

What to expect

If you chose yes during the Qualified Overtime Tracking wizard, stating that you pay employees only when they have worked over 40 hours in a week:

• We assume that all overtime paid is in line with FLSA standards. We'll automatically enter the qualified amount into the new tracking item when you run payroll.  You may edit this amount at any time when running payroll or by editing a paycheck after it's been created.

If you chose no during the Qualified Overtime Tracking wizard, it means you are either in a state with overtime laws that differ from the Federal FLSA rules, or you have a company policy that is more generous. 

• In this scenario, QuickBooks Desktop Payroll is unable to automatically enter the qualified amount. You will need to manually calculate the correct amount based solely on FLSA guidelines and enter it on each paycheck. You can also enter a lump sum amount for the year on the last paycheck for each employee.  

If you chose the wrong option during the Qualified Overtime Tracking wizard:

• The ability to change this option will be available in the future. 
• Until the preference change is available, manually enter the Qualified Overtime Tracking amount on paychecks, as needed.

If you use pay types other than the embedded Overtime 1.5x payroll item: 

• The new Qualified Overtime Tracking item won't automatically show up on your employees, even after you complete the wizard. In this situation, the item will need to be added to employees manually.

If you add multiple Qualified Overtime Tracking payroll items to a paycheck, or multiple Overtime Pay items with different rates:

• We won't be able to automatically calculate the Qualified Overtime Tracking amount. You'll need to manually adjust this when running payroll.

Due to employers being required in some states to pay out overtime differently than required by the Fair Labor Standards Act (FLSA), and due to employers being able to choose to also pay out overtime more generously than required by the FLSA, we don't have all of the information necessary to be able to accurately report qualified overtime amounts in Box 14 of the W-2 for 2025.  

The IRS guidance lists Box 14 as a voluntary option for reporting these provisions of the bill for 2025.  They also recommend that employees use the overtime item on their last pay stub for the year, and advise employers to help ensure they inform employees about how overtime is paid out (if paid out differently than the FLSA rules require). 

QuickBooks Online Payrolland QuickBooks Desktop Payroll Assisted: If you don’t already provide pay stubs to employees, send them at least their final pay stub of the year.  Alternatively, you can invite employees to use our online pay stub and W-2 program, QuickBooks Workforce, where they can download any of their pay stubs.

QuickBooks Desktop Payroll Enhanced  In addition to providing employees with their final pay stub of the year or inviting them to use QuickBooks Workforce, you may edit each W-2 to add an amount to Box 14 for your employees.  

The tax break for individuals comes when they file their income tax return at the end of the year.  Overtime pay is still taxable on paychecks.  Employees may provide an updated Form W-4 if they would like to change the taxes deducted from their paychecks.

If the amount needs to increase:  Simply add an additional amount to the “Qualified Overtime Tracking” pay item on the next paycheck.  This item is for tracking only, so there's no impact to net pay or taxes for increasing the amount tracked on future paychecks.

If the amount needs to decrease:  Edit prior paychecks to make the appropriate adjustments.  As long as you aren't changing anything else on the employee’s paycheck, there will be no impact to net pay or taxes.