Perspectives

What 2025 Taught Employers About Compliance and What’s Coming in 2026

As 2025 comes to a close, employers across the country are catching their breath after one of the busiest years in recent memory for employment law changes. From federal court rulings that upended Department of Labor overtime thresholds to a surge of new state-level requirements around paid leave, AI use, and non-compete agreements, compliance has been a moving target.

At Wagner, Falconer & Judd, we’ve spent the year helping employers navigate these changes-and now it’s time to look ahead. As you prepare for 2026, here’s what stood out in 2025, what’s on the horizon, and what proactive steps HR leaders and business owners should be taking right now.

Federal Highlights: Tax Deductions, Overtime Thresholds & AI-Usage Oversight

“One Big Beautiful Bill” (OBBB)

Although still under regulatory development, the OBBB introduces important employer and payroll-related changes. For example:

• New deductions for “qualified tips” and “qualified overtime” are available for employees from 2025-2028.
• Reporting obligations: Employers must file information returns and furnish statements showing certain cash tips and total “qualified overtime” paid during the year.
• For piece-rated workers (a historically tricky classification area), if they are non-exempt under the Fair Labor Standards Act (FLSA) and work over 40 hours in a workweek, the employer must track all hours and overtime-as the tax deduction framework still applies.

Action items for employers: 

• In your payroll and HR systems, prepare to accommodate the new reporting lines (e.g, total qualified overtime, cash tips) and ensure your W-2s/1099s reflect required items.
• Educate your payroll, HR, and finance teams about the upcoming tax-form requirements and timeline.
• Audit your workforce in tipped and piece-rate classifications: Are you correctly tracking hours, tip income, overtime? Misclassification risk remains high.

Overtime Exemption Salary Thresholds

The DOL’s (and employer-compliance) focus continues to be on the salary thresholds for exempt (white-collar) employees. While earlier proposed increases were struck down, many employers are preparing as through increases are imminent. WFJ’s resources show that:

• A threshold of $844/week ($43,888 annually) for the white-collar exemptions was noted for July 1, 2025, with a further jump to $1,128/week ($58,656 annually) on January 1, 2026
• Even if federal increases are delayed or blocked, many states maintain higher salary thresholds or independent duties/threshold test.

Action items for employers:

• Conduct a full classification audit: for every exempt employee, confirm duties test + current salary meets (or would soon meet) the most employee-friendly standard (state/local vs federal).
• Develop budget scenarios: If the salary threshold rises, what’s the cost to raise salaries vs reclassify employees as non-exempt (and pay overtime)?
• Ensure payroll systems and timekeeping are configured to track hours of any re-classified employees (non-exempt) to avoid overtime mispayment.

Artificial Intelligence (AI) in HR/Recruiting

As employers increasingly deploy automated systems in recruiting, screening, evaluations and HR decision-making, regulatory scrutiny is increasing. Some states have passed laws limiting discriminatory or opaque use of AI in hiring and personnel decisions.

Action items for employers:

• Inventory your use of automated tools (screening, voice/face-analysis, algorithmic decision-making).
• Review vendor contracts and documentation for bias safeguards, auditability, and candidate-opt-out/notice rights.
• Train HR/recruiting staff on the risk of discriminatory impact via automated tools-even if the employer did not build the tool.

State-Law Explosion: 38+ States with New Requirements

More than 38 states enacted or amended employment laws in 2025, covering topics such as sick/leave laws, non-compete bans, minimum wage increases, earned wage access, background check reforms, remote worker coverage and more.

Key areas to watch:

• Paid leave/sick & safe time: States like Minnesota, Colorado, Delaware have significant new programs or expansions. (Example: Minnesota’s Paid Family & Medical Leave program starts January 1, 2026).
• Non-compete agreement restrictions: More states are narrowing enforceability of non-competes, especially for healthcare practitioners. One noted example: Colorado’s 2025 amendment eliminating damages for violation of non-competes for certain health providers.
• Remote work/ multi-state compliance: Employers with remote workers must ensure compliance with the laws of the state where the employee physically works-not just where the employer is located.
• Wage transparency and minimum wage/ thresholds: Many jurisdictions now require posting salary ranges, or higher minimum wages.
• Rest & meal break laws / ESST (Earned Sick & Safe Time): Some states such as Minnesota have updated rules for rest/meal breaks, accrual/advance of sick time, etc.

Action items for employers with multi-state operations or remote workforce:

• Map your workforce by work-location (physical state) and ensure you track which state laws apply to each remote employee (or hybrid worker).
• For each jurisdiction: update your employee handbook/ to reflect 2025 law changes (paid-leave, rest breaks, wage transparency, non-compete enforceability, background checks).
• Update workflows: onboarding, notice delivery, wage-range postings, leave-request handling, break/meal tracking
• Evaluate whether your payroll/benefits teams are prepared for states with unique employer reporting, premium contributions, or private-plan alternatives (e.g., Minnesota’s Paid Leave).

Zeroing in on 2026: What HR Leaders Should Be Doing Now

To get ahead of the curve, here’s a checklist of priority items for employers to tackle now so you’re ready for 2026 and beyond:

Classification & salary-threshold audit

• Identify all exempt employees: job descriptions, salary levels, duties.
• Model cost scenarios: raise salary vs convert to non-exempt and pay overtime.
• Plan for system changes (timekeeping, payroll) for any re-classified employees.

Payroll/Benefits systems readiness

• Ensure your payroll system can capture/report: qualified tips, qualified overtime, new required fields on W-2s/1099s (if applicable under the OBBB).
• Prepare for leave-premium contributions or private-plan alternatives in states such as Minnesota.
• Check state-by-state premium caps and employer contribution limits.

Policy & handbook updates

• Update handbooks to reflect: new paid leave eligibility/rights, rest/meal break changes, wage-range postings, AI usage disclosures, non-compete/internship or child labor changes.
• Run internal communication campaigns to ensure employees and managers understand updated leave rights, classification status, meal/rest break rights, etc.

Remote workforce compliance mapping

• For each remote/hybrid worker, document the state of work and apply that state’s laws (not just employer’s home state).
• Revise onboarding policies to include state-specific disclosures, wage posting notices, leave program notifications, background check and “ban the box” rules, if applicable.

Automated systems & vendor review

• Review all HR/recruiting tech (AI, algorithmic decision-making, screening tools) for bias and regulatory risk.
• Ensure vendor contracts include audit rights, bias-mitigation documentation, candidate opt-out/notification procedures.

Training & Communication

• Provides supervisor/manager training on the new laws (meal/rest breaks, remote worker classification, leave rights, wage transparency).
• Communicate changes to employees (e.g., salary threshold changes, classification changes, new leave eligibility) to reduce confusion and potential litigation risk.
• Launch a “compliance awareness” campaign in your organization so HR/legal is seen as proactive instead of reactive.

Risk Assessment & Litigation Exposure Check-Up

• Ask: What are your biggest exposure areas? (Misclassification, remote-worker state law misapplication, non-compete enforcement risk, pay transparency violations, meal/rest break compliance, background-check issues.)
• Engage your employment counsel to perform a “compliance health check” now (rather than reacting after a claim.)

Insight from the Labor & Employment Environment

Beyond the laws themselves, it’s helpful to consider the broader context in which these changes are happening:

• Tight labor market & talent competition: With low unemployment and increasing demand for remote/hybrid flexibility, employers must balance compliance burdens with the need to attract and retain talent. Providing robust benefits (paid leave, flexibility) may help.
• Remote/work from anywhere workforce expansion: Many employers now have employees physically located in multiple states, each with their own employment-law landscape. This makes centralized “one-size-fits-all” policies difficult-customization is increasingly the norm.
• Greater scrutiny of classification and pay practices: Wage-hour claims, misclassification and meal/rest break litigation remain high-risk. Employers that proactively audit and adjust classifications are in a better position.
• Focus on workplace fairness, equity and technology: With expanded protections (pregnancy, caregiver status, AI bias) and increased litigation activity around discriminatory use of technology, employer practices around data, monitoring, screening and decision-making tools are under more scrutiny.
• Cost pressures and inflation: As wage demands rise (minimum-wage increases, living wage efforts) and benefits costs escalate, employers are under pressure to manage budgets-without compromising compliance. Proper modeling and budgeting for 2026 is critical.

Final Takeaways for 2025/2026

• Don’t wait for a claim to drive change. Proactive review and adjustment of classification, remote-worker state law mapping, leave/benefits program readiness, and payroll system configuration are essential.
• Focus on where your employees are physically working (not just where your HQ is) when determining applicable state laws.
• Update your HR policies, handbooks, training and communication now to reflect 2025 changes and calendar into 2026 the next wave of law changes (especially salary-threshold and leave premium updates.)
• Partner with employment law counsel-especially if you operate in multiple states, have remote employees, utilize AI/automated tools in HR, or rely on non-compete agreements.
• Recognize that the compliance burden is rising-but so is the opportunity: Employers who master compliance and craft fair, flexible, transparent workplace practices will be better positioned for talent retention and reduced litigation risk.

Need help? Our employment and labor team at WFJ is here to help take proactive steps to manage your company’s compliance strategy. Reaching out before you need help can lower litigation risk and save you money in the long run.

Current through June 1, 2025

Whether you’re a subcontractor, supplier, or equipment rental provider, navigating Minnesota’s lien and bond laws correctly is the difference between getting paid and losing your leverage. While Minnesota hasn’t implemented substantive statutory changes over the last year, it’s still critical to understand the rules, deadlines, and nuances that apply to commercial and public construction projects.

Private (Commercial) Projects: Mechanic’s Liens in Minnesota

Who Has Lien Rights?

You may file a mechanic’s lien if you have a contract with:

• The owner
• The general contractor
• A subcontractor
• Or in many cases, even a sub-subcontractor (though enforcement at this tier may be challenged).

Preliminary Notice Requirements: Simple for Most, Critical for Some

Minnesota keeps this straightforward-no preliminary notice is required on commercial projects unless the project is small (under 5,000 sq. ft. of new construction or additions).

For these small commercial projects:

• Serve preliminary notice within 45 days after your first date of furnishing
• Notice must be served via certified mail.
• Minnesota applies the “mailbox rule”, meaning service is effective the day you drop it in the mailbox.

If you’re unsure about square footage, contact an attorney early-missing this notice kills your lien rights.

When to File Your Lien

Your mechanic’s lien must be:

• Filed with the district court within 120 days after your last date of furnishing labor or materials.

This is a hard deadline-no exceptions, no extensions. 

Foreclosure Lawsuit Deadline

Minnesota requires one of the strictest enforcement timelines in the country:

• You must file your foreclosure action and personally serve all required parties within one year of your last furnishing date.

This is different from many states where service can happen after filing.

Plan Ahead: Most lien claimants should start this process by month 10 to allow adequate time for title search and personal service.

“Double Jeopardy” Lien Rights

One of the most claimant-friendly features of Minnesota lien law:

• A lien remains valid even if the owner already paid the contractor in full.

Your lien attaches to the property regardless of whether money has already left the owner’s hands.

Public Projects: Payment Bond Claims in Minnesota

When you’re working on state, municipal, or other public projects, mechanic’s liens are not available. Instead, your protection comes from the payment bond.

Which Projects Require a Payment Bond?

If the prime contract is $175,000 or more, the general contractor must furnish:

• 100% payment bond, and
• A performance bond.

If the public body fails to obtain a bond, they are financially liable to unpaid subcontractors and suppliers. 

Who Can Make a Bond Claim?

You’re eligible if you contracted with:

• The prime contractor, or
• A subcontractor.

While many sub-subcontractor claims have succeeded historically, sureties increasingly challenge them-so proceed with caution.

Preliminary Notice? Not Needed.

Minnesota does not require any early notice to secure bond rights.

Final Bond Claim Notice Deadline

This is critical.

You must:

• Serve a written bond claim notice
• Via certified mail
• On both the general contractor and the surety
• Within 120 days after your last date of furnishing labor or material

Use the addresses listed on the payment bond document. 

A notice sent to the wrong address-even if the company receives it-may be considered invalid.

Tip: Request the payment bond early-ideally at project kickoff.

Does the Mailbox Rule Apply?

Unlike private projects, the “mailbox rule” has not been confirmed for public bond notices.

To be safe:

Make sure the GC and the surety receive the notice before day 120.

Lawsuit Deadline on Bond Claims

Your lawsuit against the surety must be filed within one year of your last furnishing date. This mirrors the private lien foreclosure deadline.

No Lien Against Public Funds

Minnesota does not allow filing a lien against money held by the public entity (unlike some other states). Bond claims are your only remedy-unless the public body failed to obtain a bond.

Other Key Minnesota Construction Law Notes

Equipment Rental

Rental equipment providers have full lien rights and may also assert bond claims.

Attorney’s Fees

Minnesota courts may award attorney’s fees:

• In mechanic’s lien foreclosure actions
• And in bond claim litigation against a surety

This makes enforcement more economically viable.

Pay-If-Paid Clauses

These clauses can be enforceable-but only if the contract language is clear and unequivocal. If enforceable, your right to payment may be contingent on the contractor receiving payment from the owner.

2025 Takeaways: What Minnesota Claimants Should Be Doing

• Track your first and last furnishing dates carefully. These control all deadlines.
• Request the payment bond early on all public projects.
• Serve notices by certified mail, and keep mailing receipts.
• Calendar the 120-day and one-year deadlines immediately when a project begins.
• Act early-especially on anything requiring court filing or personal service.
• Don’t assume the GC or owner will “take care of it.” Lien and bond rights are self-help tools; protect yourself.

Navigating Minnesota’s lien and bond laws can feel complex, but you don’t have to manage it alone. Protecting your payment rights starts with understanding your deadlines, documenting your work, and taking action early-no matter the size of the project. At Wagner, Falconer & Judd, our construction law team helps contractors, suppliers, and equipment rental companies safeguard their interests and avoid costly missteps. If you have questions about a specific project, notice requirements, or enforcing a lien or bond claim, our attorneys are here to guide you every step of the way. Reach out to WFJ for clear answers, practical support, and the confidence that your rights are protected.

When managing large construction, equipment, or commercial projects, protecting your company’s cash flow isn’t just a financial necessity-it’s a survival strategy. Delayed payments, disputed invoices, and broken payment chains can quickly disrupt operations and threaten profitability.

That’s where Wagner Business Solutions comes in. Backed by the legal power of Wagner, Falconer & Judd, WBS is uniquely positioned to help businesses proactively manage credit risk and protect receivables before litigation becomes necessary.

Why Pre-Litigation Protection Matters

Most companies don’t think about involving legal support until after a payment problem arises. But by then, you’re already in reactive mode-chasing funds, facing potential defaults, and spending more time and money than necessary.

WBS flips the script. Our team works hand-in-hand with credit and finance departments to help prevent payment issues from escalating through:

• legal-backed due diligence
• early enforcement tools
• lien focused strategies for receivables protection

Three Ways WBS Protects Your Cash Flow

• Mechanic’s Lien and Bond Opinion Letters

WBS offers timely, state-specific legal opinions that determine your eligibility to file a mechanic’s lien or make a bond claim. This step is vital to ensuring your company maintains leverage when a customer fails to pay.

Why it matters:

These tools act as pre-litigation enforcement options-often prompting payment without ever going to court.

• UCC-1 Filings and Security Agreements

We help clients formalize secured interests through UCC-1 filings and properly drafted security agreements. This puts your company in a stronger position to recover goods or funds if a debtor defaults.

Why it matters:

Unsecured creditors often find themselves last in line. Securing your interest increases the odds of full recovery while preserving valuable customer relationships.

• Demand Letters and Legal Escalation

Sometimes, a strongly worded demand letter from legal counsel is all it takes to get results. WBS attorneys are experienced in crafting persuasive letters that communicate your rights and readiness to act-without alienating the customer.

Why it matters:

It demonstrates seriousness while providing an opportunity for the other party to resolve the issue before litigation begins.

Partnering with Your Finance Team

WBS doesn’t replace your internal team-we enhance it. By giving credit and finance professionals the legal tools and insight they need early in the process, we help them:

• Evaluate credit applications for enforceable terms
• Strengthen internal collections procedures
• Protect lien and bond rights before the deadlines pass
• Make strategic decisions about escalation timing

The Bottom Line

Litigation should be your last resort, not your first defense. Wagner Business Solutions helps businesses across the construction, equipment, HVAC and commercial service sectors enforce payment rights early, legally, and effectively-without burning bridges.

To learn more about how WBS can support your finance team and secure your receivables before problems escalate, contact our team.

A new Minnesota law introduces significant changes to the state’s worker’s compensation system. Signed into law in May 2024, the bill enacts recommendations from the Worker’s Compensation Advisory Council and is set to impact employers and contractors across industries, especially construction companies and projects involving multiple subcontractors.

Key Updates You Should Know

Protected Claim Amount Increases from $1,000 to $3,000

One of the most notable changes is the increase in the protected claim amount-the portion of a claim shielded from subrogation or third-party recovery-to $3,000 (up from $1,000). This adjustment recognizes inflation and rising medical costs, ensuring injured workers retain a greater portion of their benefits.

Chanages Specific to the Construction Industry

The law also implements targeted updates affecting construction projects:

• Clarifies Liability in Multi-Contractor Projects: When multiple contractors or subcontractors are on-site, liability for worker injuries must be clearly understood. The new law aims to streamline how responsibility is determined in these shared jobsite scenarios.
• General Contractors Take Note: If you work with multiple subcontractors, this law reinforces the importance of maintaining up-to-date worker’s compensation certificates from all parties. It also reitereates the need for strong indeminity language and contractual risk transfer protections.
• Special Employer Rule Adjustments: The statute refines how “special employers” (like staffing agencies or general contractors using temp labor) are treated under worker’s compensation, potentially shifting liability in some claims.

Other Key Provisions

• Clarifies Timelines for Filing and Appeals: The law updates certain administrative timelines to improve efficiency and reduce disputes.
• Improves Transparency in Dispute Resolution: Employers and insurers may see improved predictability in how the Department of Labor and Industry (DLI) and the Office of Administrative Hearings (OAH) process claims.

What This Means for Construction Businesses

If you’re a construction company owner, general contractor, or a business managing multiple subs, now is the time to:

• Review your contracts to ensure proper worker’s compensation coverage and indeminifaction clauses are in place.
• Confirm that you are tracking active coverage for all subcontractors.
• Work with legal counsel to review whether your agreements adequately address risk transfer, especially in light of the protected claim amount increase.

Even if you’re not in construction, any Minnesota employer may see greater benefit amounts retained by workers and adjusted handling of disputed claims.

Need Help Reviewing Your Contracts or Coverage Strategy?

At WFJ, our team can help ensure you’re protected and compliant under Minnesota’s evolving worker’s compensation laws. Reach out to us to discuss how this law could impact your job sites and subcontractor relationships.

The pace of employment law updates across the U.S. is accelerating-and for employers, the risk of falling out of compliance has never been higher. As of mid-2025, sweeping federal changes and hundreds of new or amended state laws are reshaping workplace obligations. From salary thresholds to paid leave expansions and non-compete bans, there’s a lot to track.

Here’s a look at several major updates employers should act on now:

The “One Big Beautiful Bill”: Tax Breaks for Hourly Workers

Starting retroactively in 2025, qualifying tipped and hourly workers can deduct certain earnings:

• Tip deductions: Up to $25,000 annually in “qualified tips” (voluntary, non-negotiable, and paid by the customer).
• Overtime deductions: Up to $12,500 in federally mandated overtime wages beyond a standard 40-hour week.

Why it matters: Employers could see tax refunds for 2025. Employers should communicate these changes and prepare for increased payroll-related questions.

The DOL’s New Salary Thresholds for Exempt Employees

If you classify employees as exempt from overtime, pay attention:

• July 1, 2025: Minimum salary= $844/week or $43,888/year.
• January 1, 2026: Minimum salary jumps to $1,128/week or $58,656/year

Why it matters: Misclassification can lead to lawsuits. Now is the time to audit exempt employees and adjust compensation or reclassify roles if needed.

AI and Discrimination Laws

States like California and New Jersey have passed laws banning discriminatory use of AI tools in hiring and HR decisions.

• AI systems that analyze facial expressions or speech may violate anti-bias laws.
• Employers are liable even if they didn’t create the AI tool.

Action tip: If you use automated hiring or decision-making systems, review them immediately for bias.

Paid Leave Expansion Across the U.S.

States like Minnesota, Colorado, Maine, and Delaware are rolling out generous paid leave programs:

• Minnesota’s Paid Family and Medical Leave starts January 1, 2026, offering up to 20 weeks of combined leave.
• Colorado will provide an extra 12 weeks for NICU-related parental leave.
• Delaware’s leave benefits begin in 2026 with up to 80% wage replacement.

What to do: Budget for these changes and update your policies and payroll systems to stay compliant.

Non-Compete Agreements Under Attack

More states are banning or restricting non-competes, especially for healthcare workers:

Arkansas, Indiana, Maryland, Pennsylvania, Montana, Texas and others are banning non-competes for physicians and licensed medical professionals.

Colorado now prohibits certain non-competes for healthcare providers and even restricts what they can communicate to patients post-employment.

Recommendation: Review all non-compete templates and consult legal counsel before issuing new ones.

Stay tuned for Part 2

In Part 2, we’ll look deeper at state-specific sick leave mandates, wage transparency laws, new worker protections (like for whistleblowers and nursing parents), and how employers can stay ahead of these fast-paced developments.

What Every Business Owner Should Know Before Signing

When purchasing or expanding a small business, real estate is often part of the equation-whether it’s a storefront, office, warehouse, or commercial lot. But while real estate can be a valuable asset, the contracts involved can carry major legal and financial risks if not handled properly.

At WFJ, we frequently help small business clients review real estate purchase agreements, leases, and sale-leasebacks tied to business acquisitions. Here’s what you need to know before entering into one of these deals.

Understand What You’re Really Buying

Not all real estate tied to a business is owned by the seller- it could be leased, encumbered, or shared with another entity. Before signing a contract:

• confirm who owns the property
• determine if the business use is allowed under zoning laws
• verify whether any liens, easements, or encroachments exist

Tip: Always request a copy of the title committment and survey during due dilligence.

Review Contingencies Carefully

Purchase agreements should inclue key contingencies to protect your interests, such as:

• Financing Contingency-Gives you the right to cancel if funding falls through
• Inspection Contingency-Lets you walk away if the building has structural or environmental issues
• Zoning/Use Contingency- ensures you can operate the business at that location

Without these clauses, you could be legally bound to complete a bad deal.

Pay Clost Attention to Lease Assignments

If you’re acquiring a business that leases its space, the landlord must usually approve the lease transfer or assignment to you. If the lease doesn’t permit assignments-or if the landlord won’t approve it-you could lose the space entirely.

Best Practice: Have an attorney review the ease terms before the sale and assist with any landlord negotiations.

Be Cautious of Seller Financing and Sale-Leasebacks

Some sellers offer to “carry the paper” (finance the property) or sell the property but lease it back as a tenant. While these can be viable options, they carry risk:

• What happens if the seller stops paying rent or defaults?
• Are the lease terms fair and market-based?
• Is the financing agreement properly secured?

A poorly structured deal could result in unexpected litigation-or leave you holding a property without reliable income.

Protect Yourself with Legal Review

Even the most straightforward real estate deals can involve complex legal language, hidden liabilities, or obligations that follow the property after closing.

Working with an experienced attorney-especially one who understands small business transactions-ensures that:

• the agreement is legally sound
• your liability is limited
• your rights are protected if the deal doesn’t go as planned

The Bottom Line

Real estate can be one of the most valuable assets in a business acquisition-or one of the riskiest. By understanding the key issues and involving legal counsel early in the process, you can move forward with confidence and avoid costly mistakes.

On July 4th, 2025, President Donald Trump signed the One Big Beautiful Bill-a sweeping federal tax package that includes two headline-grabbing provisions: a new deduction for qualified tips and another for qualified overtime pay.

While these deductions are marketed as middle-class tax relief, they bring significant payroll and compliance changes for employers. Here’s what your business needs to know now-and how to prepare for what’s next.

Tip Deduction: Up to $25,000 for Eligible Employees

Employees in jobs that customarily and regularly receive tips-think hospitality or food service-can now deduct up to $25,000 in qualified tips from their taxable income.

To qualify:

• The tip must be voluntary, non-negotiable, and determined by the customer. 
• It must be received in 2025 or later while the provision is in effect (2025–2028).
• The deduction is reduced for high earners: $100 less for every $1,000 earned over $150,000 ($300,000 if filing jointly).

However, not all tip-based professions qualify. Employees in fields such as law, medicine, finance, performing arts, and consulting are excluded from this deduction. * (see the end of the post for a more comprehensive list of included fields.)

What this means for employers:

• You must report both the amount of cash tips received and the employee’s qualifying occupation on their W-2.
• FICA withholding and employer obligations for tips still apply.
• The deduction applies retroactively, so 2025 tips are already in scope.

Overtime Deduction: Up to $12,500 Per Employee

Non-exempt employees under the FLSA who work more than 40 hours per week can now deduct up to $12,500 in qualified overtime pay from their taxable income ($25,000 on a joint return). As with tips, the deduction phases out at higher income levels.

“Qualified overtime” must exceed the employee’s regular rate and be mandated under federal law. It cannot be counted as a qualified tip.

Employer impact:

• You must separately report total qualified overtime on W-2s and possibly Form 1099.
• Updated IRS withholding tables will take affect starting 2026.
• Like the tip deduction, this rule is retroactive for 2025 pay.

Key Takeaways for Employers

These new deductions may increase employee interest in reporting overtime and tips-but that accuracy comes with added responsibility for your business.

Here’s what you’ll need to watch:

• Payroll reporting updates: new W-2 data fields will require software and process updates.
• Recordkeeping requirements: Detailed tracking of qualifying wages, occupations, and hours worked is essential.
• Expiration timeline: These provisions are set to end after 2028 unless extended, so employers should prepare for both implementation and sunsetting.
• Behavioral shifts: More employees may seek tipped or overtime work, which could ease staffing gaps but also raise overtime costs.
• State taxes: These are federal deductions only-your state tax obligations may not change.

What Comes Next from the Treasury

The law directs U.S. Treasury (via the IRS) to:

• Publish a list of eligible tipped occupations within 90 days.
• Issue regulations to prevent misclassification of wages as tips.
• Provide new withholding guidance starting in 2026.
• Allow employers to use reasonable estimation methods to comply during the 2025 transition period.

How WFJ Can Help

Industries like hospitality, healthcare, retail, construction, and service are likely to feel the biggest impact from these changes. But any business with tipped or non-exempt employees should take note.

The WFJ Compliance Center is monitoring IRS rulemaking closely and can help your business:

• Interpret the new federal requirements
• Adjust internal systems and payroll process
• Maintain compliance and avoid reporting errors

If your team is affected by these new provisions, now is the time to act. Contact us today to get ahead of these changes and ensure your reporting compliance practices are ready for what’s next.

*Additional fields excluded from tip deductions

• health
• law
• engineering
• architecture
• accounting
• actuarial science
• performing arts
• consulting
• athletics
• financial services
• any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees
• investing
• investing management
• trading
• dealing in securities partnership interests
• commodities