Processing Overtime: Navigating Upcoming Changes for Cleaning and Security Operations

Important Disclaimer: This article provides general information and is not legal or tax advice or a political opinion. Consult with internal and/or external counsel, as well as a qualified tax professional, for guidance specific to your business and employees. 

The commercial cleaning and security industries frequently depend on dedicated employees working beyond standard hours to meet client demands. Whether it’s handling emergency security situations or ad hoc cleaning services, overtime is often an operational necessity rather than an option.

Upcoming changes to federal tax law regarding overtime compensation are on the horizon and may affect both your employees and your business operations. 

The commercial cleaning and security industries frequently depend on dedicated employees working beyond standard hours to meet client demands. Whether it’s handling emergency security situations or ad hoc cleaning services, overtime is often an operational necessity rather than an option.

Upcoming changes to federal tax law regarding overtime compensation are on the horizon and may affect both your employees and your business operations. 

Why Overtime Changes Matter for Your Industry

On July 4, 2025, Public Law No. 119-21, also known as “The One Big Beautiful Bill Act” (OBBBA), was enacted, which finalizes significant tax cuts and reforms. Starting in the 2025 tax year, a new federal tax treatment deduction is being introduced that allows certain employees to deduct a portion of their overtime pay. This deduction applies to the “premium portion” of their overtime compensation — essentially the extra amount they earn above their regular hourly rate.

How These Overtime Changes May Impact Your Employees 

Consider a security guard earning $20/hour who works overtime at $30/hour. Under the new rules, that additional $10/hour premium can be deducted from their federal taxable income. For employees regularly working overtime, this may represent some annual savings, however there are important limitations and qualifications*. 

• Deduction Caps: The tax benefit is capped at $12,500 per year for individual employees ($25,000 for married couples filing jointly). Once an employee’s overtime premium reaches this amount, additional overtime premiums won’t qualify for the deduction.
• Income Limits: Higher-earning employees may not receive the full benefit. The deduction begins to phase out when an employee’s modified adjusted gross income exceeds $150,000 ($300,000 for married couples filing jointly).
• Tax Type Limitations: This deduction only applies to federal income tax. Employees will still pay Social Security and Medicare taxes (FICA) on all overtime premiums.
• Overtime Type Restrictions: Only overtime required under federal law qualifies. This means overtime mandated by state laws, union contracts or voluntary company policies above federal requirements won’t qualify for the tax deduction. Specifically, only the premium-only portion of overtime required under Section 7 of the Fair Labor Standards Act (FLSA) qualifies for the deduction. 

The following types of overtime do NOT qualify for the tax deduction: 

1. Straight time portion of overtime required under Section 7 of the FLSA
2. Overtime and double time required under state law
3. Overtime and double time required by a collective bargaining agreement
4. Overtime and double time paid voluntarily by an employer

*Please note, these limitations and qualifications are based on current legislative proposals as of early August 2025 and are subject to change.

For the most current information see https://www.ssa.gov/employer/

How These Overtime Changes May Impact Your Business

While employees may benefit from the tax deduction, employers will need to make significant adjustments to their payroll and reporting processes.

New Reporting Requirements: You will be required to track and report the eligible overtime premium amounts separately on filing year 2026 W-2 forms. The draft 2026 Form W-2 contains changes due to the OBBBA, including new Box 12 codes. Box 12 has three new codes: TA – employer contributions to a Trump account; TP – total amount of qualified tips and TT – total amount of qualified overtime compensation. This requires the ability to distinguish between regular overtime pay and the premium portion, adding a new layer of payroll data management and reporting accuracy.

Additional W-2 Changes: Tip reporting changes have also been implemented. Box 14 is now 14a – Other and 14b – Treasury tipped occupation code. Employers may use Box 14a to report information such as state disability insurance taxes withheld, union dues, union payments, health insurance premiums deducted, nontaxable income or educational assistance payments. Employers may use Box 14b to report the treasury occupation code for an employee’s tipped occupation, which is used to report an employee’s qualified tips as required by the OBBBA.

Please note, these changes were made only to the draft 2026 version. The IRS has stated that Form W-2 will remain unchanged for 2025, but has not yet addressed how payroll will report overtime wages and tip income that eligible employees will need in order to calculate their federal income tax exclusion for the 2025 tax year.

Operational Adjustments: For cleaning and security operations that rely heavily on overtime, this represents a substantial change to existing payroll processes. Organizations using contractors may have similar tracking and reporting requirements.

Changes in Overtime: A Tentative Timeline

2025 Tax Year: New W-2 reporting requirements are expected to take effect, requiring separate reporting of qualified overtime compensation amounts.

2026 Implementation: Withholding procedures are anticipated to be modified, allowing employees to see tax benefits in their regular paychecks rather than waiting for tax season.

WinTeam’s Role in Supporting Your Success

As your payroll and workforce management partner, we understand that regulatory changes shouldn’t disrupt your core business operations. Our focus is ensuring your systems can seamlessly adapt to these new requirements while maintaining the reliability your operations depend on.

• System Capabilities: WinTeam is designed to handle complex payroll calculations and reporting requirements. The distinction between regular wages and overtime premiums aligns with our system’s existing capability to manage detailed compensation structures.
• Collaborative Implementation: We’re actively engaged with industry organizations and monitoring regulatory developments to ensure our updates continue to support your compliance efforts as well as operational needs. TEAM Software’s product team has already commenced the design phase for the required updates (the collection of qualified overtime) and we anticipate having more definitive information available soon. In addition, we are working with payroll organizations and industry leaders to clarify the reporting requirements. The IRS has announced that it will provide guidance on steps for employers who have not collected the necessary information for reporting. And, we are working with the IRS, SSA and States to resolve any conflicts with taxing overtime pay.
• Ongoing Support: As regulatory guidance continues to develop, we remain committed to providing the system updates and support necessary to keep your operations running smoothly.

Key Areas of Focus for Your Business

Based on the new requirements, key areas that may require attention include:

• System Assessment: Organizations may review their current payroll system’s ability to separate and track overtime premium amounts. Systems must be able to distinguish between the base overtime rate and the premium portion for W-2 reporting. If you are a current WinTeam user, monitor your system updates and communications for information about overtime premium tracking capabilities as they become available.
• Process Documentation: Organizations will need to document how overtime premiums will be calculated, tracked, and reported. Procedures for identifying which overtime qualifies under federal law versus state or contractual requirements will be essential.
• Testing and Validation: Test your systems to ensure accurate calculation and reporting of qualified overtime premiums. Process validation will be critical to ensure new W-2 reporting requirements are met in tax year 2026.
• Timeline Planning: With the 2025 tax year approaching, organizations should develop a preparation timeline that ensures adequate system updates, staff training, and process validation before the requirements take effect.

Important Disclaimer: This article is for informational purposes only and is not legal or tax advice or a political opinion. No action should be taken without guidance from Consult with internal and/or external counsel, as well as a qualified tax professional, for guidance specific to your business and employees.