A new federal law enacted last year provides a tax benefit to employees who receive overtime pay – but calling it a “No Tax on Overtime” law is a bit of misnomer. For starters, OT pay remains taxable and subject to withholding rules. And while a new income tax deduction may be available to some employees who work overtime, only a limited portion of federally required overtime compensation is tax deductible. We’ll clear up some of the biggest misconceptions surrounding these new rules and provide some key employer takeaways – which will become especially important this tax season and beyond as more employees learn the realities of these rules and the IRS cracks down on employers’ new filing and information reporting obligations.
Overview of “No Tax on Overtime”
The One Big Beautiful Bill Act (OBBBA), which President Trump signed into law last year, includes a new federal income tax deduction related to overtime pay. This new deduction:
The deduction is allowed for both itemizers and non-itemizers, so long as the individual includes their social security number on their tax return. If an individual is married, they must file a joint return in order to claim this deduction.
The Big Question: What Does “Qualified Overtime Compensation” Mean?
The law defines “qualified overtime compensation” as “overtime compensation paid to an individual required under section 7 of the Fair Labor Standards Act” (FLSA) that exceeds the individual’s “regular rate” (as determined by the FLSA), excluding qualified tips. This language expressly conditions an employee’s right to claim the federal tax benefit on federal labor law requirements, specifically excluding overtime compensation mandated solely by state law.
Is “No Tax on Overtime” a Misnomer? Top 3 Misconceptions and Employer Challenges
There are plenty of misconceptions floating around related to the implications of the Big Beautiful Bill, especially related to the “No Tax on Overtime” provisions. In order to separate myth from reality, here are three key clarifications on the top mistaken beliefs.
1. The new tax deduction is only available for overtime pay required by the FLSA.
The FLSA generally requires employers to pay covered, nonexempt employees at least 1.5 times their “regular rate” of pay for all hours worked beyond 40 hours in a given workweek. This is very important to keep in mind because some states have overtime laws that overlap with, but also go beyond, the requirements of the FLSA. For example:
Therefore, if an employee receives overtime pay that is required by state, but not federal, law, such amounts are not “qualified overtime compensation” under the OBBBA, and no portion is deductible by the employee for federal income tax purposes.
2. The deductible amount may be less than you think.
As explained above, the new deduction related to overtime pay is capped at $12,500 ($25,000 for joint filers) and is reduced or phased out completely based on an individual’s MAGI for the year. In addition, the amount that is deductible is not the full amount of the individual’s FLSA-required overtime compensation – rather, it is the portion that exceeds the individual’s “regular rate” of pay as determined under federal law.
Here’s an example:
3. All overtime pay remains subject to payroll taxes and withholding rules.
The phrase “No Tax on Overtime” is misleading because it doesn’t actually mean that overtime pay is no longer taxable. To the contrary, all OT pay remains subject to federal income tax (though, as explained above, employees may be eligible to claim a limited income tax deduction for qualified overtime compensation) and therefore subject to income tax withholding rules. However, employees may opt to adjust their Forms W-4 to reflect any expected deductions for qualified overtime compensation.
In addition, all overtime compensation remains fully subject to other payroll taxes, such as Social Security and Medicare taxes (both the employer’s share and the employee’s share), because the OBBBA’s new tax deduction applies only for federal income tax purposes.
Why Should Employers Care About Any of This?
While the OBBBA’s new overtime deduction is a tax benefit for employees filing individual tax returns, it impacts employers in several important ways.
Conclusion
Overtime pay remains taxable – though some employees may be allowed to claim a portion of it as a federal income tax deduction. Employers should work with counsel on filing, reporting, and withholding issues, as well as employee communications, related to qualified overtime compensation.
Article courtesy of Fisher Phillips
We won’t pretend to have a crystal ball when it comes to what will happen in the labor and employment legal landscape in the new year, especially given the nature of modern-day politics. But despite the uncertainty, Fisher & Phillips’ developed their best predictions to help you plan for 2026. You can read the entire FP Workplace Law 2026 Forecast here, or you can dive into this Insight for the top 10 predictions pulled from our report.
Government Relations: DC Will Be Full Speed Ahead Once Again
The second Trump administration has been operating at a breakneck pace and there are no signs of that changing in 2026, especially with control of Congress on the line. The White House is aware that its agenda would face additional roadblocks if Republicans were to lose control of either the House or the Senate, so there will be concerted effort to move forward with the president’s priorities as soon as possible in the new year. This includes confirming judges to benches across the country (and potentially the Supreme Court if Justices Thomas or Alito retires), continued deportation efforts (especially given ICE’s boosted budget), and reducing the size of the federal government.
Immigration: An H-1B Lottery Overhaul is Coming
A growing series of pressures on the H-1B system in 2025 already brought heightened investigations, new fee requirements, intensified employer scrutiny, and a sweeping new social media vetting requirement for H-1B workers and their families.
In 2026, it is predicted that DHS will replace the current random H-1B cap lottery with a weighted selection system that gives higher-wage positions better odds of being chosen, potentially as soon as the March 2026 cap season. Even if litigation slows implementation this coming year, it’s likely to take effect during this administration. The change will heavily favor employers able to offer Level III–IV wages, making it harder for startups, non-profits, and entry-level roles to secure visas. This will force many organizations to rethink compensation strategies and diversify their global talent pipelines.
Artificial Intelligence: Bias Audits Will Become a Must-Have for Employers
Despite a recent executive order targeting “onerous” state AI laws, employers will continue to face a growing patchwork of state and local laws focused on combating AI bias in hiring and the workplace. And an AI bias audit is one of the most effective ways to identify and mitigate risk given the evolving state of AI-related laws springing up around the country. Indeed, plaintiffs’ attorneys are already using the absence of an audit as evidence of negligence or discriminatory design.
Wage and Hour/Pay Equity: State Enforcement to Step Up
States with robust wage and hour and wage payment laws (such as CA, IL, NJ, NY, WA) will continue to aggressively enforce their laws during a period when DOL enforcement activities may decline (in part, due to a reduction in the number of investigators). On the other hand, expect federal enforcement to continue to take a business-friendly approach, and expand the multiple compliance assistance programs it rolled out in 2025.
Fisher & Phillip’s also anticipates a noticeable uptick in pay equity litigation, fueled by well-publicized gender pay settlements and pro-plaintiff decisions in states with robust pay equity statutes. Use the F&P Pay Equity and Transparency Map to track state developments on pay discrimination laws.
Workplace Safety: New Leaders Promise a Business-Friendly Approach
New leadership will mean a new day for employers. Now that David Keeling is in place as the new head of OSHA and Wayne Palmer has been confirmed to lead MSHA, it is expected that efforts to increase outreach to industry will begin. For example, F&P predicts OSHA will issue few, if any, press releases after an employer is cited for safety violations. We also expect fewer regulations to be proposed or promulgated.
Labor Relations: The NLRB Will Begin Dismantling the Biden-Era Board’s Legacy
The Board should finally return to a legal quorum by early 2026. It will likely seek to overturn several significant Biden-era cases in the months thereafter, including rulings that addressed restrictions on workplace conduct rules, remedies available for unfair labor practices, and mandatory captive audience meetings, among other precedent-setting decisions. In response, unions are expected to abandon their reliance on the NLRB. This could mean an increase in labor grievances in union shops. Unions may also revisit recognitional picketing to pressure employers into recognizing them outside the election process.
Sports: Continued Battle Over Student-Athlete “Employee” Status
Both the DOL and NLRB were directed by President Donald Trump to clarify the status of student-athletes as part of a July executive order. While it’s unlikely the Trump administration will be willing to upend the current college sports model by deeming college athletes as employees who have collective bargaining rights and overtime protections, guidance from these agencies on the issue has yet to materialize.
Privacy and Cyber: Wiretapping Litigation Wave Will Keep Churning
In addition to continued proliferation of privacy laws at the state level, we expect the plaintiffs’ bar to continue the wave of wiretapping and related claims against businesses relating to the use of tracking technology on company websites.
While the statutes being used as ammunition in these lawsuits predate the internet, courts are allowing them to move forward across the country, exposing businesses to expensive class action litigation. This trend began primarily in California, but it has already expanded to other states. It is anticipated that it will continue to do so, unless or until state legislatures or courts directly address the application of wiretapping and other long-standing laws (that were intended for other purposes) to the use of tracking technology on websites.
International: Expanded Protections for Non-Traditional Workers
Multinational businesses should prepare for upcoming regulatory changes related to non-traditional workers, including freelancers and gig workers. For example:
Construction: AI Claims, Immigration Enforcement to Increase
As the adoption of drones and AI-driven tools become commonplace, issues around privacy, data protection, off-the-clock work, and workplace surveillance will require contractors to develop clearer policies and disclosures. Additionally, we expect wage-theft enforcement actions to expand in more states, leading to more audits and increasing the importance of compliance and record-keeping.
Increased I-9 audits and ongoing jobsite raids will also require employers to continue to be vigilant about verification and compliance. Fisher Phillips offers a Rapid Response Team for DHS Raids to support employers when an workplace enforcement action occurs at your business.
As employers prepare for the next Affordable Care Act (ACA) reporting cycle, understanding the 2026 deadlines and new compliance options is critical. The IRS has finalized the reporting forms and instructions for the 2025 calendar year, along with updates that simplify the process for Applicable Large Employers (ALEs).
Here’s what employers need to know.
Applicable Large Employers (ALEs) must meet the following ACA reporting deadlines for the 2025 calendar year:
Non-ALEs that sponsor self-insured or level-funded plans face the same deadlines when submitting Forms 1094-B and 1095-B.
Under the ACA, employers are required to report information about health coverage offered to employees:
Reporting is completed through IRS Forms 1094-C and 1095-C (for ALEs) or 1094-B and 1095-B (for non-ALE self-insured plans).
Thanks to the Paperwork Burden Reduction Act (PBRA), ALEs now have a new way to fulfill their reporting obligations without furnishing a Form 1095-C to every full-time employee.
Instead, employers can:
The online notice must:
Example:
A “Tax Information” link on a benefits website leading to a page labeled “IMPORTANT HEALTH COVERAGE TAX DOCUMENTS” with instructions for obtaining the form.
This streamlined furnishing method mirrors an existing option for insurance carriers and non-ALEs reporting via Form 1095-B.
Starting with the 2025 reporting year, the IRS now requires electronic filing for virtually all ACA reports.
Previously, employers filing fewer than 250 forms could submit on paper—but that’s no longer an option.
Under the new aggregation rule, employers that file 10 or more total information returns (including Forms W-2, 1099, and ACA forms) must file electronically through the IRS Affordable Care Act Information Returns (AIR) system.
Because the AIR system requires a specific XML schema format, most employers will need to work with an ACA reporting vendor—such as a payroll provider, benefits administration platform, or specialized ACA reporting service.
Failure to comply with ACA reporting requirements can be costly.
For forms due in 2026, the IRS penalties are as follows:
| Violation | Penalty per Form | Maximum Annual Penalty |
|---|---|---|
| Late or Incorrect Filing or Furnishing | $340 | $4,098,500 |
| Intentional Disregard | $680 per form (no max) | — |
Employers may also qualify for “reasonable cause” relief if they can demonstrate responsible efforts to comply and mitigating circumstances beyond their control (see Treas. Reg. §301.6724-1 and IRS Publication 1586).
To prepare for 2026 ACA reporting:
For 2026, ACA reporting brings both greater convenience and stricter electronic filing rules.
Employers should take advantage of the new online furnishing option while ensuring they’re ready to meet the March deadlines and avoid compliance penalties.
The Patient-Centered Outcomes Research Institute (PCORI) fee established by the Affordable Care Act helps fund research to evaluate and compare health outcomes, clinical effectiveness, risks, and benefits of medical treatment and services. The fee, which is adjusted annually, is currently in place through 2029. In Internal Revenue Bulletin 2025-45, the IRS announced that the PCORI fee for plan years ending between October 1, 2025, and September 30, 2026, is $3.84. As has been the case in previous years, this new fee is an increase from the $3.47 payment for policy or plan years that ended between October 1, 2024, and September 30, 2025.
Employers and plan sponsors with self-funded plans are typically responsible for submitting IRS Form 720 and paying the PCORI fee by July 31 of the calendar year immediately following the last day of the plan year, meaning that payments for plan years that end in 2025 will be due in July of 2026. PCORI fees for self-funded plans are assessed on all covered lives, not just on employees. Plan sponsors can use one of three methods to calculate the average number of covered lives for the fee: the actual count method, the snapshot method, and the Form 5500 method.
Many fully insured employers do not need to take any action, as the insurer will submit the payment on their behalf. However, remember that fully insured employers with self-funded HRAs must pay the fee for each employee covered under the account.
The annual Gag Clause Prohibition Compliance Attestation (GCPCA) required under a transparency provision in the Consolidated Appropriations Act, 2021 (CAA) must be submitted electronically to the Centers for Medicare & Medicaid Services (CMS) by December 31, 2025. Submission information — including FAQs, instructions, a user manual and an Excel spreadsheet for multiple reporting entities — can be accessed on the CMS website.
Group health plan sponsors and health insurance issuers must annually attest that their agreements with healthcare providers, third-party administrators (TPAs) or other service providers do not include a “gag clause.” To meet this requirement, health insurance issuers as well as fully insured and self-insured group health plans — including ERISA plans, non-federal governmental plans and church plans subject to the Internal Revenue Code — must submit an annual GCPCA, with the exception of the following:
Note: It appears that this CAA transparency requirement, like others under the CAA, would not apply to retiree-only plans. For health reimbursement arrangements (HRAs) — including individual coverage HRAs — and other account-based plans, the Departments of Labor, Health and Human Services, and the Treasury are using discretion when it comes to enforcing this requirement until they can exempt these plans through the official rulemaking process.
Earlier this month, the IRS issued Rev. Proc. 2025-32, which announces the 2026 indexed limits for certain health and welfare benefits. This is in addition to the limits the IRS announced in Rev. Proc. 2025-19 on May 1, 2025.
| 2025 | 2026 | |
|---|---|---|
| HSA Contributions | $4,300 for self-only coverage $8,550 for family coverage | $4,400 for self-only coverage $8,750 for family coverage |
| HSA-Compatible HDHP Deductible | $1,650 for self-only coverage $3,300 for family coverage | $1,700 for self-only coverage $3,400 for family coverage |
| HSA-Compatible HDHP Out-of-Pocket Maximum | $8,300 for self-only coverage $16,000 for family coverage | $8,500 for self-only coverage $17,000 for family coverage |
| Health FSA Salary Reductions | $3,300 | $3,400 |
| Health FSA Carryover | $660 | $680 |
Medicare Part D annual enrollment period, plan sponsors that offer prescription drug coverage must provide notices of creditable or noncreditable coverage to Medicare-eligible individuals.
The required notices may be provided in annual enrollment materials, separate mailings or electronically. Whether plan sponsors use the federal Centers for Medicare & Medicaid Services (CMS) model notices or other notices that meet prescribed standards, they must provide the required disclosures no later than Oct. 15, 2025.
Group health plan sponsors that provide prescription drug coverage to Medicare Part D-eligible individuals must also disclose annually to the CMS (within 60 days following their plan renewal) whether the coverage is creditable or noncreditable. The disclosure obligation applies to all plan sponsors that provide prescription drug coverage, even those that do not offer prescription drug coverage to retirees.
Background
The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 requires group health plan sponsors that provide prescription drug coverage to disclose annually to individuals eligible for Medicare Part D whether the plan’s coverage is “creditable” or “noncreditable.” Prescription drug coverage is creditable when it is at least actuarially equivalent to Medicare’s standard Part D coverage and noncreditable when it does not provide, on average, as much coverage as Medicare’s standard Part D plan.
Disclosure of whether their prescription drug coverage is creditable allows individuals to make informed decisions about whether to remain in their current prescription drug plan or enroll in Medicare Part D during the Part D annual enrollment period. Individuals who do not enroll in Medicare Part D during their initial enrollment period (IEP), and who subsequently go at least 63 consecutive days without creditable coverage (e.g., they dropped their creditable coverage or have non-creditable coverage) generally will pay higher premiums if they enroll in a Medicare drug plan at a later date.
Who Gets the Notices?
Notices must be provided to all Part D eligible individuals who are covered under, or eligible for, the employer’s prescription drug plan—regardless of whether the coverage is primary or secondary to Medicare Part D. “Part D eligible individuals” are generally age 65 and older or under age 65 and disabled, and include active employees and their dependents, COBRA participants and their dependents, and retirees and their dependents.
Because the notices advise plan participants whether their prescription drug coverage is creditable or noncreditable, no notice is required when prescription drug coverage is not offered.
Also, employers that provide prescription drug coverage through a Medicare Part D Employer Group Waiver Plan (EGWP) are not required to provide the creditable coverage notice to individuals who are eligible for the EGWP.
Notice Requirements
The Medicare Part D annual enrollment period runs from Oct. 15 to Dec. 7. Each year, before the enrollment period begins (i.e., by Oct. 14), plan sponsors must notify Part D eligible individuals whether their prescription drug coverage is creditable or non-creditable. The Oct. 14 deadline applies to insured and self-funded plans, regardless of plan size, employer size or grandfathered status
Part D eligible individuals must be given notices of the creditable or non-creditable status of their prescription drug coverage:
According to CMS, the requirement to provide the notice prior to an individual’s IEP will also be satisfied as long as the notice is provided to all plan participants each year before the beginning of the Medicare Part D annual enrollment period.
Model notices that can be used to satisfy creditable/non-creditable coverage disclosure requirements are available in both English and Spanish on the CMS website. Plan sponsors that choose not to use the model disclosure notices must provide notices that meet prescribed content standards.
Notices of creditable/non-creditable coverage may be included in annual enrollment materials, sent in separate mailings or delivered electronically. Plan sponsors may provide electronic notice to plan participants who have regular work-related computer access to the sponsor’s electronic information system. However, plan sponsors that use this disclosure method must inform participants that they are responsible for providing notices to any Medicare-eligible dependents covered under the group health plan.
Electronic notice may also be provided to employees who do not have regular work-related computer access to the plan sponsor’s electronic information system and to retirees or COBRA qualified beneficiaries, but only with a valid email address and their prior consent. Before individuals can effectively consent, they must be informed of the right to receive a paper copy, how to withdraw consent, how to update address information, and any hardware/software requirements to access and save the disclosure. In addition to emailing the notice to the individual, the sponsor must also post the notice (if not personalized) on its website.
In Closing
Plan sponsors that offer prescription drug coverage will have to determine whether their drug plan’s coverage satisfies CMS’s creditable coverage standard and provide appropriate creditable/noncreditable coverage disclosures to Medicare-eligible individuals no later than Oct. 15, 2025.
Florida’s minimum wage will rise yet again on September 30, jumping to $14/hour (and to $10.98 for tipped workers) as part of a series of scheduled increases approved by voters in 2020.
How We Got Here
In November 2020, Florida voters approved a constitutional amendment that gradually increases the state’s minimum wage to $15 per hour for most non-exempt employees by 2026. As a result, the state’s hourly minimum wage increased from $8.65 to $10 in 2021 and has been rising since by $1.00 each year on September 30 ($11 in 2022 and $12 in 2023). The next wage hike will soon take effect and continue rising through 2026, as shown in the schedule below:
Florida’s tipped employees also have received bumps in minimum wages each year since 2021. Just like non-tipped employees, the minimum wage for tipped workers will increase by $1.00 each year through 2026, as shown in the schedule below:
What Should You Do?
All Florida employers are required to comply with the new minimum wage requirement. If an employee is not paid at the required rate, they could be entitled to recover back wages plus damages and attorneys’ fees and costs under the state’s wage theft law and the Florida Minimum Wage Act. In addition, employers found liable for intentionally violating minimum wage requirements could be subject to a $1,000 fine per violation. Here’s what you should do to prepare for the new wage hike and stay compliant:
A new lawsuit just filed against Otter.ai underscores the legal and compliance risks companies face when using AI notetakers – and serves as a good reminder to deploy best practices to reduce your risks. The August 15th case alleges that Otter’s popular transcription tool secretly records conversations without proper consent and then uses that data to train its machine-learning models. While AI notetakers can boost productivity, they also raise privacy, security, and compliance questions. This Insight reviews the lawsuit, goes over key risks, and outlines seven practical steps businesses should take before relying on AI transcription tools.
Case Summary: Brewer v Otter.ai
The consumer filed a proposed class action in California federal court against Otter.ai, maker of the widely used Otter Notetaker. The complaint alleges the app unlawfully records conversations in popular video conferencing platforms without the consent of all participants.
Key allegations include:
Importantly, these are only allegations at early stages of the litigation. The complaint reflects the plaintiff’s version of events only. Otter has not yet filed its response to the lawsuit, the court has not made any findings of fact or law, and the company will have an opportunity to contest and defend these claims in court.
The Real Risks With AI Notetakers
Let’s be clear: we know you’re going to use a notetaker app – we’re not here to talk you out of it. And even if employers tell their employees not to use these tools, studies show employees are using them anyway. So cases like this highlight why employers need to proceed carefully. Common concerns include:
7 Steps Businesses Can Take
If your organization is using or considering AI notetaker tools, here are seven proactive steps to manage risk:
1. Update Consent Protocols
2. Carefully Vet Your Vendors
3. Establish a Company Policy
4. Limit Recording of Sensitive Conversations
5. Review Security Safeguards
6. Train Employees and Managers
7. Develop a Governance Framework
Employers in Florida need to comply with the state’s stricter employment verification obligations, or they could face serious consequences. Since 2023, private businesses with at least 25 employees have been required to use the federal E-Verify system to confirm employment eligibility for new hires. Although the law garnered considerable media attention when it was first enacted, many employers may not know the state conducts compliance audits and imposes penalties for violations. Here’s how employers can be prepared and create a plan to mitigate legal and financial risks.
What is E-Verify?
What Does Florida Mandate?
Florida’s Audit Process
You should note that certain state agencies have the authority to audit employers suspected of noncompliance, including Florida’s Department of Economic Opportunity (DEO) and Department of Law Enforcement (FDLE). The audit process generally includes:
Certain repeat violations can result in fines of up to $1,000 per day and the potential suspension or revocation of a state business license.
An Action Plan for Florida Employers
Covered Florida employers are required to take the following steps to stay compliant:
You should also consider taking these additional steps to mitigate the risk of violations and state investigations:
