New IRS overtime rules are now in effect: What restaurants should know

New IRS overtime rules are now in effect: What restaurants should know

Wed, August 19, 2026 at 10:05 PM GMT+3 2 min read

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As new overtime rules take effect for the coming tax season, the grace period for business owners is now over. The IRS has updated its guidance for qualified overtime compensation — also known as "No Tax on Overtime" — and the responsibility now lies squarely on employers' shoulders.

Before 2025, overtime pay was not eligible for a special tax deduction, and employers reported all wages as a single amount on W-2 forms. Then, with the passage of the One Big Beautiful Bill Act in July 2025, new qualified overtime compensation deductions of up to $12,500 for single filers or $25,000 for married couples were created. Deduction benefits phase out starting at $150,000 annual income for single filers or $300,000 for married couples.

During the 2025 transition year before these new rules went fully into effect, employers had flexibility in reporting qualified overtime compensation: They could use W-2 forms, online portals, or separate statements.

Now, employees will no longer be responsible for determining if they qualify for overtime tax relief. Instead, employers must separately track and report each employee's overtime compensation eligibility on the W-2 form, and failure to do so will result in financial penalties (between $60-$660 per W-2 form, depending on timing and business size).

Qualified overtime is defined as hourly employees working beyond the standard 40 hours per week, and only the premium portion counts (i.e. the half in time-and-a-half).

For the restaurant industry, these rules will significantly change how employers operate during tax season, as restaurants employ significant numbers of overtime-eligible hourly employees.

With mandatory standardized overtime reporting now in place, employers should update payroll systems, understand what constitutes qualified overtime under the new rules, and report all overtime comprehensively, even if employees are unable to deduct it all.

Contact Joanna at joanna.fantozzi@informa.com