3 Year-end Payroll & Compliance Updates Employers Need to Know

As year-end approaches, it’s important for employers to review upcoming payroll and compliance changes that could affect their reporting, employee communication, and filing requirements in 2025. Following are three major updates from the IRS that all businesses—large and small—should be aware of as they prepare for W-2s, ACA filings, and electronic reporting.

1. Overtime Reporting on Form W-2: Transition Relief for 2025

The IRS has issued transition relief for tax year 2025, meaning employers are not required to separately report overtime pay on Form W-2 this year. However, employees may still need this information to claim deductions under the One Big Beautiful Bill Act (OBBBA).

Employer Options for 2025

• Report overtime in Box 14 of Form W-2
  Pros: Helps employees claim deductions easily; proactive for future compliance.
  Cons: Requires payroll system updates; adds administrative steps.
• Provide a separate year-end statement to employees
  Pros: Gives employees clear documentation for deductions; flexible format.
  Cons: Additional administrative effort; must ensure accuracy.
• Do not report overtime separately
  Pros: No penalty for 2025; avoids system changes now.
  Cons: Employees may lack documentation for deductions; could lead to inquiries.

What Counts as “Qualified” Overtime?

Only the premium portion of overtime required under the Fair Labor Standards Act (FLSA) is deductible. If an employee earns $20/hour and works 50 hours in a week:

Regular pay: 40 × $20 = $800
Overtime pay: 10 × $30 = $300
Qualified deduction: (10 hrs. × $10 premium) = $100

The maximum annual deduction is $12,500 for single filers or $25,000 for joint filers. Amounts phase out at higher income levels.

2. Electronic Filing Threshold: 10-Return Rule

Beginning last year, the IRS significantly lowered the threshold for mandatory electronic filing. Employers who file 10 or more combined information returns must file electronically—including W-2s, 1099s, 1098s, and other similar forms.

Action Steps for Employers

• Count all information returns across all categories.
• Register for an IRS-approved e-filing system:
  • SSA Business Services Online
  • IRS IRIS Portal
• Obtain a Transmitter Control Code (TCC) if needed.

If your organization has traditionally filed paper returns, now is the time to ensure your systems and processes support electronic filing ahead of 2025 deadlines.

3. Affordable Care Act Filing Requirements & ALE Status Determination

If your organization averaged 50 or more full-time employees and full-time equivalents (FTEs) in 2024, you are considered an Applicable Large Employer (ALE) for 2025.

ALE Responsibilities Include:

• Offering affordable, minimum essential health insurance coverage to full-time employees and dependents
• Filing Forms 1094-C and 1095-C with the IRS
• Providing Form 1095-C to employees

Calculating ALE Status

1. Count all full-time employees and FTEs each month of 2024.
2. Add them together.
3. Divide by 12. Employees working 30+ hours/week or 130+ hours/month count as full-time.

This calculation is critical—incorrectly assuming you are not an ALE could lead to penalties.

Next Steps for Employers

As you prepare for year-end filings, consider the following:

• Decide if and how you will provide overtime information to employees.
• Confirm you are set up for the required electronic filing.
• Determine 2025 ALE status and begin preparing 1094/1095 forms if required.

Yeo & Yeo’s payroll and compliance professionals are here to assist with your year-end reporting needs.

Download the 2026 Payroll Brief

For a deeper look at payroll updates and year-end requirements, download Yeo & Yeo’s 2026 Payroll Planning brief.