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Impact of the No Tax on Overtime provision to QuickBooks Payroll

by Intuit•1• Updated a day ago

The One, Big, Beautiful Bill (OB3), also known as the “Working Families Tax Cut Act," became law on July 4, 2025 as Public Law 119-21. The tax breaks received from this act will be taken when individuals file their personal income taxes.  There are no changes to tax withholdings on paychecks. 

The rules for tracking and reporting “qualified overtime” for tax years 2026–2028 will require some attention when running payroll.

What’s Qualified Overtime

Qualified Overtime is the compensation that exceeds the regular rate of pay that is required to be paid to an individual under section 7 of the Fair Labor Standards Act (FLSA) of 1938. 

The FLSA provides that employers must generally pay covered, nonexempt employees one-and-a-half times their regular rate of pay for hours worked over 40 hours per week.  This means that the “half” of the “time-and-a-half” required by the FLSA is “qualified overtime.” 

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

Amounts that exceed the “half” of time-and-a-half, or amounts paid more generously than what is required by the FLSA hours per week rule won't qualify for the tax breaks.  This includes states which have policies that differ from the FLSA.

Track Qualified Overtime in QuickBooks:

We'll automatically add a new “Qualified Overtime Tracking” item to each employee who has our embedded Overtime or Double Overtime items active.  

  • If you are using other items instead of the embedded ones in QuickBooks, you’ll need to add this new tracking item to your employees manually. 
  • This new item is for tracking the qualified overtime amount. It doesn't increase an employee’s pay and doesn't impact taxes.  
  • You can continue to use your existing overtime pay types to pay employees any overtime due. You will also need to manually calculate the dollar amount of that overtime that is qualified based on the rules.

We assume that all overtime paid is in line with FLSA standards and will 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 use our embedded overtime pay types, we'll still populate a Qualified Overtime Tracking amount during run payroll, but you will 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.

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

Follow the step 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.

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.

Frequently Asked Questions

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.

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