Good morning. Two federal tax breaks came in with the 2025 tax law, your techs have started asking about both, and one of them lands squarely on a trades payroll. Here's what actually applies to your shop — and the one thing you have to do before the year is out.
Top story — The overtime deduction is real, it's on your hourly techs, and 2026 makes it your paperwork
The 2025 tax law (P.L. 119-21, the One Big Beautiful Bill Act) created a new federal deduction for qualified overtime compensation for tax years 2025 through 2028. A worker can deduct up to $12,500 of it — $25,000 on a joint return — whether or not they itemize (IRS). It reaches almost any hourly tech: if you pay time-and-a-half for hours over 40 in a week because the Fair Labor Standards Act says you have to, that overtime is in play.
One catch decides everything downstream: the break is only the premium — "the 'half' portion of the 'one and one-half times,'" in the IRS's own words — not the whole overtime check. And a second catch is yours, not your tech's. For 2025, the IRS said employers were "not required to report qualified overtime compensation separately" on the W-2. For 2026 and later, "payors and employers are required to separately report qualified overtime compensation" — on the W-2 in box 12, code TT — and "no relief is available for tax years after 2025" (IRS, FS-2026-13). The free year is over. The 2026 W-2 you hand each tech at the start of 2027 has to break the overtime premium out — and getting that right is a payroll job you set up now, not a form you fix in January.
Quick hits
It's a deduction, not a fatter paycheck — set that expectation before your crew does the math wrong. The break is the overtime premium only, capped at $12,500 ($25,000 joint), and it phases out once a worker's modified adjusted gross income tops $150,000 ($300,000 on a joint return) (IRS). It also doesn't change withholding on its own: a tech who wants it reflected in take-home pay "must submit … a new … Form W-4," and otherwise the benefit shows up only when they file, on the new Schedule 1-A (IRS). Nobody's check automatically gets bigger.
The "tips" break isn't just for waiters — residential trades are on the list. Treasury's occupation list for the separate up-to-$25,000 tips deduction includes, under "Home Services," Home Electricians, Home Plumbers, Home Heating and Air Conditioning Mechanics and Installers, Home Appliance Installers and Repairers, and Home Maintenance and Repair Workers — the last of which names roofers (Treasury). So a tip a residential customer hands your tech can qualify. But only a real tip counts: qualified tips are "voluntary cash or charged tips," never a mandatory service charge or a trip fee you print on the invoice (IRS).
Don't assume 2026 works like 2025. The relief that let employers skip separate overtime reporting was a one-year grace while the forms caught up — not a permanent pass (IRS). And because the figure has to cover the whole year, it's far cleaner to have payroll flag the overtime premium from January on than to reconstruct twelve months of it at W-2 time.
The Tip — Get payroll set to break out the overtime premium, before year-end
One job, this quarter. Call whoever runs your payroll — your provider or your bookkeeper — and confirm two things for the 2026 tax year: that the system separates the FLSA overtime premium (the "half") from base pay, and that it will report it in box 12, code TT, on the 2026 W-2. If you run payroll in-house, check it yourself now, because only FLSA-required overtime counts — overtime you pay by contract or company policy that the FLSA doesn't require won't qualify, and a system that lumps it all together will overstate the number. This is a reporting job, not a tax you owe. But if the W-2 is wrong, your tech is the one who can't cleanly claim the deduction — and you're the one who gets the call.
Tool watch — [Not sponsored]
The IRS has published all of this itself, for free. Its "No Tax on Overtime" page and the Schedule 1-A instructions spell out exactly what your techs will file; Treasury's tipped-occupation list lets you check whether your residential crews are on it. Point your office manager and your techs at those primary pages instead of at a payroll vendor's sales page — same facts, no upsell. No one paid for this mention.
That's the callout. See you next time.
The Callout — the business brief for the trades. We label every commercial placement: [Sponsor], [Affiliate], or [Not sponsored]. Today's Tool watch is our own honest read — no one paid for it, and the only things named are free federal government pages. 231J Ramparts Road, Te Anau 9600, New Zealand · Unsubscribe anytime. Nothing in The Callout is tax, legal, or payroll advice. How these deductions apply to any specific worker or shop, and how you set your payroll to report them, is a decision for you and your own CPA or payroll provider — this issue describes a general federal rule, not advice for your situation.
Sources
U.S. Internal Revenue Service — FS-2026-13, Questions and answers about the new deduction for qualified overtime compensation (August 2026; supersedes FS-2026-01): "Starting in tax year 2026, payors and employers are required to separately report qualified overtime compensation" (FAQ 6); reported "beginning in 2026, on Form W-2 in box 12, using code TT" (FAQ 10); "no relief is available for tax years after 2025" (FAQ 20). https://www.irs.gov/pub/taxpros/fs-2026-13.pdf
U.S. Internal Revenue Service — Questions and answers about the new deduction for qualified overtime compensation (qualified overtime = FLSA §7 pay above the regular rate, the "'half' portion of the 'one and one-half times'"; deduction up to $12,500 / $25,000 joint; phase-out above $150,000 / $300,000 MAGI; for 2025 employers "are not required to report qualified overtime compensation separately," for 2026 and later they "are required to separately report" it and Forms W-2/1099-NEC/1099-MISC "will be updated"). https://www.irs.gov/newsroom/questions-and-answers-about-the-new-deduction-for-qualified-overtime-compensation
U.S. Internal Revenue Service — What to know about the No Tax on Overtime deduction (deduct pay that exceeds the regular rate; max $12,500, $25,000 joint; phases out over $150,000 / $300,000; "available regardless of whether you itemize or take the standard deduction"; claimed via Schedule 1-A). https://www.irs.gov/newsroom/what-to-know-about-the-no-tax-on-overtime-deduction
U.S. Internal Revenue Service — Treasury, IRS provide guidance for individuals who received tips or overtime during tax year 2025 ("For tax years 2025 through 2028"; tips deduction max $25,000; overtime max $12,500 / $25,000 joint; phase-out over $150,000 / $300,000). https://www.irs.gov/newsroom/treasury-irs-provide-guidance-for-individuals-who-received-tips-or-overtime-during-tax-year-2025
U.S. Internal Revenue Service — One, Big, Beautiful Bill: How to take advantage of no tax on tips and overtime ("Qualified tips are voluntary cash or charged tips received from customers or through tip sharing"; deductions available whether or not the taxpayer itemizes). https://www.irs.gov/newsroom/one-big-beautiful-bill-how-to-take-advantage-of-no-tax-on-tips-and-overtime
U.S. Internal Revenue Service — How to update withholding to account for tax law changes for 2025 ("If you are an employee and want to account for these deductions in the income tax withheld from the remainder of your paychecks in 2025, you must submit to your employer a new 2025 Form W-4"). https://www.irs.gov/forms-pubs/how-to-update-withholding-to-account-for-tax-law-changes-for-2025
U.S. Department of the Treasury — Tipped Occupations (Detailed), 8-27-2025 (the "400s – Home Services" category: 401 Home Maintenance and Repair Workers [entry references roofers]; 403 Home Electricians; 404 Home Plumbers; 405 Home Heating and Air Conditioning Mechanics and Installers; 406 Home Appliance Installers and Repairers). https://home.treasury.gov/system/files/136/Tipped-Occupations-Detailed-8-27-2025.pdf
U.S. Internal Revenue Service — Treasury, IRS issue final regulations listing occupations where workers customarily and regularly receive tips under the One, Big, Beautiful Bill (final regulations; eight occupation categories including "400s – Home Services"; occupations must "customarily and regularly receive tips"). https://www.irs.gov/newsroom/treasury-irs-issue-final-regulations-listing-occupations-where-workers-customarily-and-regularly-receive-tips-under-the-one-big-beautiful-bill
FS-2026-13 read 15 October 2026 (US) / 16 October 2026 (NZ); all other IRS/Treasury pages read 24 September 2026 (US) / 25 September 2026 (NZ).