No Tax on Overtime

[TerryDK]

I received a payment last month of nearly $16k as part of a class action against a former employer for unpaid overtime worked in 2020 and 2021. Half was received as W2 wages and the other half as 1099. With the new tax laws regarding “no tax on overtime,” will TurboTax calculate this payment correctly?

[Cindy4]

The qualified overtime for the no tax on overtime deduction is in effect for tax years 2025 - 2028, not for overtime earned in prior years.  It will be reported by employers .  The method for reporting this is still to be determined by the IRS.  As the IRS releases information, our developers will integrate the changes into TurboTax to populate the appropriate questions to easily navigate entry of the needed information.

When entering a 1099 for back wages from a lawsuit in TurboTax, you will navigate through the "Miscellaneous Income" section and specify that the payment is from a lawsuit settlement. The process varies slightly depending on whether you received a Form 1099-MISC or a Form 1099-NEC

For updates on the No Tax on Overtime deduction, please visit our  One Big Beautiful Bill Tax Law Changes and How That Impacts You:

• no tax on overtime - deduction of up to $12,500 per taxpayer with phaseout for MAGI over $150,000 (o...

Hope this helps!

Cindy

[TerryDK]

Thank you, Cindy!

While the overtime was earned in prior years, it was paid in 2025. Surely the tax laws for 2025 will apply?

[Cindy4]

Unless there is a change made subsequent to the new bill, the general rule is that a legal settlement for lost wages or unpaid wages is taxed just like the wages would have been. The IRS treats it as a replacement for income you should have earned. 
Tax implications of settlements and judgements - this contains links to the relevant Internal Revenu....

The "No Tax on Overtime" provision allows eligible employees to deduct up to $12,500 of "qualified overtime compensation" from their federal taxable income.

To be "qualified," the overtime must be earned during the 2025-2028 tax years and be for the "premium portion" of your overtime pay (the extra half of your time-and-a-half rate). Since your settlement is for overtime worked in 2020 and 2021, it does not meet this requirement.

IRS Pub 525 - General resource for reference on taxable and non-taxable income.

Hope this clarifies it a bit!
Cindy

[Ajimmy19]

Which forms do I need to apply for No Tax on Overtime if employers put everything under W-2?

[Opus 17]

There is new information.  The IRS is not changing the W-2 for 2025.  As a result, your overtime will not be automatically reported.  We still haven't seen the final forms or regulations.  It may be that the employer will issue a letter with the correct info, or it could be that you self-disclose.  We have to wait for the final forms and instructions. 

[Cindy4]

The IRS has not finalized the new forms yet, but the deduction will ultimately flow to Part III on the Schedule 1-A of the 1040.  TurboTax will guide you through entering the amount and generate any needed forms.  The employers are not required to report the qualified overtime compensation in a separate box on your W-2 for 2025, they will for 2026, but are being encouraged to report it as an item in box 14 for 2025 or provide a separate statement.  Alternatively, you can track it yourself utilizing pay stubs.  Keep in mind that only "qualified overtime compensation", is deductible and is limited to $12,500 or $25,000 if married filing jointly.