Overtime

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On August 6, 2026, the IRS released Fact Sheet FS-2026-13, substantially revising and replacing FS-2026-01, its January 2026 guidance on the new deduction for qualified overtime compensation enacted by the One Big Beautiful Bill Act (OBBBA). The revised guidance reflects the transition from the temporary 2025 reporting relief period to a more formal compliance regime applicable for tax years 2026 through 2028.  As a reminder, the IRS provided transition penalty relief for tax year 2025 to excuse the requirement that employers and other payers report qualified overtime compensation separately on Forms W-2, 1099-NEC, and 1099-MISC. See Notice 2025-62.

While the updated fact sheet includes numerous technical revisions, several changes are particularly significant for employers, payroll providers, and employees seeking to claim the deduction. Most notably, the IRS emphasizes that beginning in 2026 employees generally may claim the deduction only based on amounts separately reported by employers, increasing the importance of accurate overtime calculations and information reporting.

Key Changes in FS-2026-13

The August update to the FAQs:

  • Removes guidance applicable solely to the 2025 transition year.
  • Clarifies deduction limitations and timing rules, including that the same principles governing when a payment is treated as wages for income tax withholding purposes apply to determine when qualified overtime compensation is paid.
  • Expands guidance regarding Fair Labor Standards Act (FLSA) coverage and exemptions.
  • Provides detailed Form W-2, Form 1099-NEC, and Form 1099-MISC reporting rules.
  • Adds federal income tax withholding guidance.
  • Clarifies the requirement that qualified overtime compensation be separately reported to support the deduction.
Continue Reading IRS Updates FAQs on the Qualified Overtime Compensation Deduction: Compliance Obligations for Employers

Special thanks to our law clerk Marjorie Simón for contributing to this update.

Mexico has kicked off 2026 with two major legal developments that employers cannot afford to ignore. In January and March, sweeping reforms reshaped the compliance landscape—introducing mandatory workplace training focused on preventing violence against women and launching a phased reduction of the standard workweek from 48 to 40 hours. Together, these changes reflect a broader regulatory push toward workplace equality, safety, and work‑life balance, while also creating new operational and compliance challenges for employers operating in Mexico. Read on for more information.

Continue Reading Mexico Employers Take Note: New Training Obligations and a Reduction of the Workweek

While we do not often report on proposed legislation, two provisions in the bill the House Ways and Means voted out of Committee on May 14th (and which was voted out of the House Budget Committee on May 18th) are worthy of attention, as they reflect how two of President Trump’s campaign promises are beginning to take shape. Sections 110101 and 110102 of the Ways and Means Committee’s “One, Big, Beautiful Bill” would give certain workers an above-the-line deduction for “qualified tips” and “qualified overtime compensation” for taxable years beginning after December 31, 2024, and ending for taxable years beginning after December 31, 2028. Assuming the effectives dates relate to the service provider’s returns, and most service providers have a calendar year return and are on the cash method of accounting, the deduction would apply to tips and overtime paid in 2025 through 2028. This means the deductions are proposed to be retroactive and proposed to apply to amounts paid even before enactment of the bill.

As an above-the-line deduction, service providers will be able to directly reduce their gross income, whether they itemize or take the standard deduction, by the amount of the qualified tips or overtime. Making this deduction available to the worker creates reporting and withholding obligations for the service recipient, as discussed in more detail below. 

In order to be deductible as qualified overtime compensation, the payment must be overtime paid as required under section 7 of the Fair Labor Standards Act that is in excess of the regular rate (as used in that section) at which such individual is employed. Qualified overtime compensation does not include any amount treated as a qualified tip.

In order to be deductible, qualified tips generally must be paid voluntarily to a person who works in an occupation which traditionally and customarily received tips on or before December 31, 2024. The Secretary of the Treasury is directed to provide a list of occupations that traditionally and customarily received tips in 2024 and before. As proposed, the deduction for qualified tips applies for both employees receiving a Form W-2, and independent contractors receiving a Form 1099-K or Form 1099-NEC, and includes amounts reported by the business on Form 4137. Those whose personal business provides services in accounting, health, law, actuarial science, athletics, brokerage services, consulting, financial services, or the performing arts would not be allowed to claim the tip deduction. In the case of tips received in the course of a trade or business, the deduction is proposed to be limited to gross receipts from the business less costs of goods sold and expenses allocable to such receipts. The Secretary of the Treasury is directed to prescribe regulations to prevent abuse of the deduction and reclassification of income as tips.

Continue Reading No Tax on Tips and Overtime Campaign Promises Take Shape in “One, Big, Beautiful Bill”

Employers must pay for all hours they know or “have reason to believe” employees worked. But can employers simply rely on teleworking employees to report all of their hours worked, or must they instead investigate whether their employees have accurately reported their work time? With the huge increase in teleworking since the start of the COVID-19 pandemic, this question should be top-of-mind for employers.

On August 24, 2020, the US Department of Labor issued Field Assistance Bulletin No. 2020-5 (FAB) to clarify an employer’s obligations in determining whether teleworking employees have accurately reported their work time. In short, the employer is not required to comb through every cell phone or computer login record to look for unreported work time that the employer neither knew of nor had reason to believe had been worked. As long as the employer provides employees with reasonable time-reporting procedures and does not otherwise impede or discourage reporting, its failure to compensate employees for unreported and unknown hours of work is not an FLSA violation. The FAB and some key takeaways for employers are summarized below.Continue Reading A “Reason to Believe”: DOL Says the Obligation to Determine Remote Employees’ Hours of Work is “Not Boundless”

On March 28, 2019, the US Department of Labor announced a proposed rule to clarify that certain types of compensation and benefits can be excluded from an employee’s “regular rate” of pay, which is used to calculate overtime under the FLSA. This announcement follows the DOL’s recent proposal to increase the minimum salary requirements for the FLSA’s white-collar overtime exemptions, continuing the DOL’s efforts to update and modernize FLSA regulations.
Continue Reading US DOL Proposal To Clarify “Regular Rate” For Modern Workplace Practices

In our latest podcast, Baker McKenzie partner Joe Deng introduces Tomohisa Muranushi to discuss employment laws in Japan and give an overview of what changed in 2017 as well as what we can expect for the year ahead.

Key Takeaways:

  1. Reduce excessive overtime
  2. Encourage greater female participation
  3. Watch out for developments regarding fixed term contracts

…

Medical care providers have been experiencing an uptick in Fair Labor Standards Act lawsuits based on automatically deducted meal periods. Recently, a nurse filed a collective action lawsuit against St. Luke’s Health System Corporation and various affiliates, claiming that they failed to pay nurses for work performed during meal breaks. Specifically, the nurse alleges that St. Luke’s automatically deducts 30 minutes from each shift for meal periods, assuming that its nurses are able to find a 30-minute block of time to eat. The nurse further claims that, in reality, nurses remain on duty when attempting to eat, and that their meal periods are frequently interrupted. Given the potential for large liability and the likelihood of copycat lawsuits, employers—particularly medical care providers—should examine their meal period policies to ensure the policies are compliant with the Fair Labor Standards Act.
Continue Reading Food for Thought—Does Your Automatic Meal Period Policy Violate the Law?