New Tax Developments That Require Attention Now

There are a number of important matters requiring the attention of nonprofit organizations as we head into 2026.  In this Alert, we have summarized an important consideration related to overtime pay reporting for 2025, and we have included links to recent BMWL Special Alerts regarding several other important matters requiring attention now or in the near future.

Reporting Overtime Pay to Employees and Other Payees – 2025

The One Big Beautiful Bill Act (OBBBA) added Section 225 to the Internal Revenue Code, which created a new deduction for individuals who receive qualified overtime compensation.  The amount of the deduction is equal to the amount of pay that exceeds their regular rate of pay, such as the “half” portion of “time-and-a-half” compensation that is required by the federal Fair Labor Standards Act (FLSA), subject to certain limitations described below.  [Note that only the pay above the regular rate of pay for overtime compensation required by the FLSA qualifies for the deduction – if a state or other jurisdiction requires overtime pay that is not required by the federal FLSA, such overtime pay does not qualify for the deduction.]

The provisions of OBBBA state that, for an individual to take the deduction, the qualified overtime compensation must be reported on a Form W-2, Form 1099, or other specified statement furnished to the individual.  The maximum annual deduction is $12,500 ($25,000 for joint filers), and the deduction phases out for taxpayers with a modified adjusted gross income exceeding $150,000 ($300,000 for joint filers).

OBBBA also requires employers and other payors to file information returns (i.e., Forms W-2 or 1099) and furnish statements to workers showing the total amount of qualified overtime compensation paid to them during the year.  Penalties apply to employers who fail to file correct information returns or fail to furnish correct payee statements to recipients.

Under OBBBA, the tax deduction for overtime pay and related reporting requirements were made effective retroactively to January 1, 2025.

Temporary Transition Relief

Even though the requirement for employers and other payors to report qualified overtime pay to workers in a certain manner is technically required by OBBBA for the year 2025, the IRS announced that Forms W-2 and 1099 for the tax year 2025 would not be updated in time to account for the OBBBA-related changes.

Accordingly, on November 5, 2025, the IRS announced that it was providing penalty relief to employers and other payors for tax year 2025.  In IRS Notice 2025-62 and the related Information Release 2025-110, the IRS states that 2025 will be treated as a transition period for purposes of IRS enforcement and administration of the new information reporting requirements for qualified overtime compensation.  Under the transition relief, the IRS will not impose a penalty on employers and other payors for failing to report the total amount of qualified overtime compensation separately…either to applicable government agencies or to workers.  The relief is limited to returns and statements filed and provided for the 2025 tax year and applies only to the extent that the person required to make the return or statement otherwise files and provides a complete and correct return or statement.

However, the IRS encourages employers and other payors to provide employees/payees with separate accountings of qualified overtime compensation so that the employee/payee has readily available the information necessary to claim the deduction for qualified overtime compensation for 2025.  The IRS has indicated that employers and payors can make this information available through an online portal, provide additional written statements to employees/payees, include it in Box 14 of the employee’s Form W-2, or use other secure methods.  In Notice 2025-69, the IRS has indicated that, for 2025, employees/payees can rely upon information reported to them by employers to claim the deduction.  Alternatively, if employees do not receive a reporting of the qualified overtime compensation from their employers, Notice 2025-69 provides instructions to employees on how to reasonably determine the amount of qualified overtime compensation for 2025.

Starting in 2026, employers should be prepared to keep proper accounting and reporting of qualified overtime compensation.  As of the date of this writing, the draft 2026 Form W-2 instructions appear to indicate that qualified overtime compensation will be reportable in Box 12, with the code TT.

Reminders About Other Matters Requiring Attention

 We previously issued Alerts regarding other relevant tax developments to consider as 2025 comes to a close and 2026 begins.  Importantly:

• We provided a sample year-end letter to donors, which was included in our Special Alert linked here.  This sample letter highlights a few nontraditional giving methods, informs donors of upcoming limitations to charitable deductions beginning in 2026 under OBBBA, and is drafted for use by churches, schools, and other publicly supported 501(c)(3) charities.

• We explained the final regulations from the IRS and Department of the Treasury related to catch-up contributions to 401(k) and 403(b) plans, which take effect January 1, 2026, in our Special Alert linked here.

• We also remind clients soliciting funds in Florida about new restrictions on soliciting or accepting donations from a “foreign source of concern,” as explained in our Special Alert linked here.

• Finally, we remind organizations that rent out real estate to others in Florida about the end of Florida sales tax on commercial real estate rent...as addressed in our Special Alert linked here.

BMWL Can Help

 As always, if you would like assistance addressing the information described in this Alert, we would be glad to help!  Please email our team at Info@NonprofitCPA.com.