The One Big Beautiful Bill Act (OBBBA) “No Tax on Overtime” Employer Summary
What Is the Deduction?
For tax years 2025–2028, individuals may claim an above-the-line federal income tax deduction for “qualified overtime compensation”— the premium portion of overtime pay required under the Fair Labor Standards Act (FLSA) and paid in excess of the regular rate of pay. The deduction is up to $12,500/ year for single filers and $25,000 for joint filers and phases out for taxpayers with modified adjusted gross income (MAGI) over $150,000 ($300,000 for joint filers).
Who Is Eligible?
The deduction is available to both employees and nonemployees (e.g., independent contractors) who receive qualifying overtime compensation.
Employer Responsibilities – Tax Year 2025
Reporting Requirements
Employers are not required to separately report qualified overtime compensation on the 2025 Form W-2 or provide a separate statement for 2025.
Best Practices
- Employers are encouraged to voluntarily provide employees with a separate accounting of qualified overtime compensation, such as in Box 14 of Form W-2 or a separate statement.
- Employer report should include the following:
- Tax Year Covered
- Total Qualified Overtime Compensation
- The total dollar amount of “qualified overtime compensation” paid to the employee during the year. This should be the amount that meets the definition under IRC section 225(c): overtime compensation required under section 7 of the Fair Labor Standards Act (FLSA) that is in excess of the regular rate at which the individual is employed.
- If possible, the report should distinguish between FLSA-required overtime and any additional overtime or premium pay not required by the FLSA, as only the FLSA-required portion is deductible.
- Methodology/Calculation
- A brief description of how the qualified overtime compensation was calculated (e.g., “This amount represents the FLSA overtime premium, calculated as the additional one-half times the regular rate for hours worked over 40 in a workweek, as required by 29 USC §207(a).”).
- If the employer pays overtime at a higher rate (e.g., double time), the report should specify the method used to isolate the FLSA-required portion (e.g., “For double time, the FLSA overtime premium is one-half of the total overtime amount.”).
Employee Responsibilities – Tax Year 2025
Determining Eligibility
- Only the FLSA-required overtime premium (generally, the “half” portion of “time-and-a-half” pay for hours over 40 in a workweek) is deductible. Overtime paid under state law or employer policy that exceeds FLSA requirements is not deductible.
- Employees must determine if they are FLSA-eligible (i.e., not exempt from FLSA overtime protections).
Calculating the Deduction
- If the employer provides a statement (e.g., in Box 14 of Form W-2 or a separate statement), use that amount.
- If not, use earnings statements, pay stubs, payroll system reports and apply one of the IRS’s reasonable methods to estimate the FLSA overtime premium:
- If a statement shows only the total overtime (regular + premium), use one-third of the total as the deductible amount.
- If overtime is paid at double time, use one-fourth of the total.
- If only the premium is shown, use that amount.
- If no statement is available, use a reasonable method based on regular rate and hours worked over 40 per week.
Filing Requirements
- Claim the deduction on Form 1040 for 2025.
- Social Security Number should be included on the return.
- If married, file jointly to claim the deduction.
For more information, or if you have thoughts and/or questions about the information outlined above, please do not hesitate to contact us; our seasoned and experienced tax professionals are always here to help. You can also learn more by visiting our Tax service page.
