No Tax on Overtime: What K–12 Leaders Need to Know

A Tax Break That Comes With New Responsibilities

Starting January 1, 2025, a new federal tax break could mean meaningful savings for school employees who earn overtime. The “No Tax on Overtime” provision, part of Section 70202 of the One Big Beautiful Bill Act (OBBBA), allows eligible staff to deduct a portion of their overtime wages from their federal income taxes.

But behind the headlines lies a significant shift in how districts track and report time. What sounds simple on the surface requires school business officials and HR teams to rethink how they classify, track, and communicate overtime. The upside is real—but only if your systems are ready.

What the Law Says

According to IRS Notice 2025-69 and early guidance:

• Employees may deduct up to $12,500 (or $25,000 for those married filing jointly) of “qualified overtime compensation” from taxable income.
• Only the “premium” portion of overtime pay—the half-time required under the Fair Labor Standards Act (FLSA)—is eligible.
• The deduction phases out for individuals earning over $150,000 (or $300,000 for joint filers).
• For the 2025 tax year, employers are granted transition relief and may use reasonable methods to estimate and communicate qualified overtime.
• In 2026, employers will be expected to report the total on W-2s using Box 12 with code TT, according to the current draft form.

What Counts as Qualified Overtime?

Only overtime pay mandated by the FLSA qualifies. That means hours worked over 40 per week by non-exempt employees, with the deductible portion being the extra half-time premium. Supplemental compensation like shift differentials, union-negotiated bonuses, or holiday pay premiums typically doesn’t qualify.

This distinction matters in K–12, where layered compensation structures are common. Accurately breaking out the qualifying portion of overtime requires more granularity than many districts currently capture.

Why It Matters to K–12 Leaders

This isn’t just a tax change. It’s a payroll visibility challenge. Districts will be expected to:

• Identify and separate FLSA-eligible overtime by employee and by pay period.
  
• Help employees understand what portion of their overtime qualifies for the deduction.
  
• Prepare to report total qualified overtime for 2026 W-2s using the TT code.
  

As CPA Alex Jones noted on Medium:

“Accurate tracking is critical. Misinformation online has led some employers to mistakenly think they no longer need to track or run overtime through payroll, which is incorrect."

Tom O’Saben, director of tax content and government relations for the National Association of Tax Professionals, said:

“The biggest takeaway is how much responsibility the IRS is shifting to taxpayers for the 2025 year.”

In other words, districts that don’t have airtight time collection practices in place will be underprepared—and their employees will be the ones left scrambling during tax season.

What Are the Stakes? 

The IRS has acknowledged that employers need time to adapt. Under IRS Notice 2025-62, the agency is providing transition relief for the 2025 tax year. Employers will not be penalized under IRC Sections 6721 and 6722 for failing to separately report qualified overtime compensation, tips, or occupation codes, as long as the overall information return is accurate. This relief exists because Form W-2 and related reporting systems were not updated in time for the 2025 filing season.

However, this relief is temporary.

Beginning with the 2026 tax year, full compliance will be mandatory. Employers will be expected to accurately track and report qualified overtime compensation as a distinct data element. Failure to do so can result in penalties ranging from $50 to $250 per return, depending on how late or incomplete the correction is. In large districts, these penalties can compound quickly when applied across hundreds or thousands of employees.

Just as important, the absence of penalties in 2025 does not eliminate the operational requirement. Employees will still rely on employer-provided data to claim the new overtime deduction. Districts that cannot identify and separate FLSA-mandated overtime by employee and by pay period risk creating confusion for staff and additional administrative burden during tax season.

In short, 2025 is a grace period, not a pass. Districts that use this time to strengthen time collection and payroll data practices will be far better positioned when reporting requirements tighten in 2026.

Where Touchpoint Can Help

At Touchpoint, we’ve been working closely with K–12 payroll and operations teams to prepare for changes just like this. Our purpose-built time clocks gather punch data at the source: clean, reliable, and ready to feed into your payroll system.

Here’s how our platform supports districts navigating the new law:

• Capture every punch with precision. Our SmartClock devices log clock-ins and outs with accurate job codes and physical locations, supporting transparency and accountability across departments.
• Verify with visual records. SmartClock offers visual validation for each entry, while PunchBuddy enhances this with time-stamped, context-rich logs to support audit readiness.
• Deliver clean data to your payroll system. Our hardware sends verified punch data directly to your time and attendance platform, laying the foundation to isolate FLSA-eligible overtime hours and ensure your team is working with the most complete records possible.

Touchpoint clocks are not just time trackers—they're a critical part of your payroll accuracy infrastructure. When the IRS starts looking for clear documentation, you'll want to know every hour is accounted for.

If your current process can't show which hours are FLSA-eligible by employee and pay period, it's time to fix that. IRS rules are changing, and with the right time collection hardware, your district won't have to scramble to keep up.

Districts that prepare now won't scramble later. See how SmartClocks capture the data you'll need for 2026 reporting—[request a demo call here].