One of the most talked about parts of “The One Big Beautiful Bill Act” (“OBBBA”) has been “no tax on overtime”. As a business owner or leader, it’s important to know what, exactly, is meant by “overtime” and how to account for this new deduction.

The bill created an above-the-line federal income tax deduction for “qualified overtime compensation.” This only includes overtime mandated by the federal Fair Labor Standards Act (FLSA) time-a-half requirements triggered by an employee working over 40 hours in a week. It is available for tax years 2025 through 2028:

1. Qualified Overtime Deduction: The OBBBA “No Tax on Overtime” deduction allows eligible employees to deduct up to $12,500 annually ($25,000 for married filing jointly) of “qualified overtime compensation” from federal taxable income.
   • The deduction applies exclusively to overtime compensation required under the FLSA—the premium portion of pay above the regular rate for hours worked beyond forty in a workweek. This means the “half” in “time-and-a-half”, but not the regular wage.
     • For example, an employee earning $20/hour straight time and $30/hour overtime can only deduct the $10/hour FLSA-mandated overtime premium portion for hours work over 40 in a week.
   • The deduction does not apply to:
     • Overtime paid under collective bargaining agreements that exceeds FLSA requirements to pay time-and-a-half overtime. (e.g., the deduction does not apply to overtime required by a CBA for work beyond eight hours in a day; it only applies to overtime triggered by working over 40 hours in a week).
     • Voluntary premiums paid by employer policy not required by the FLSA.
     • Shift differentials, weekend premiums, or other non-FLSA mandated overtime.
     • Overtime paid pursuant to state law requirements that exceed FLSA requirements (e.g., daily overtime in California).
2. Income Limitations: The deduction phases out for individuals with modified adjusted gross income (MAGI) exceeding $150,000 ($300,000 for married filing jointly), reducing $100 for every $1,000 over the threshold.
   • Married taxpayers MUST file jointly to get deduction and include the SSNs of both spouses.
3. Federal Income Tax Only: The deduction applies only to federal income tax. It does not alter payroll taxes such as Social Security and Medicare, state taxes and local taxes.
4. Employer Reporting: Employers must track and separately report OBBBA “qualified overtime compensation” on Form W-2. Treasury will issue guidance on reporting.
   • For 2025 only, employers may use “any reasonable method” specified by the Treasury to approximate “qualified overtime compensation” during the transition period.
   • Employers must maintain records distinguishing FLSA-required “qualified overtime compensation” under the OBBBA from other overtime and premium pay.
   • Be sure your payroll system can separately track FLSA-required overtime from other overtime and premium pay for W-2 reporting.

What you should do today

 There are two important steps to take as soon as possible:

1. Talk with your payroll provider to see if any changes need to be made on your (the employer’s) end to accurately report on the year-end W-2s for employees
2. Confirm that your payroll provider is aware of an implementing the above items for year-end 2025 reporting.

Corrigan Krause is here to help

Navigating the changing tax landscape can be challenging, but the Tax Team at Corrigan Krause can help. Click here to learn more about becoming a Corrigan Krause client or to reach out to your team members.

 

Thank you to the Signatory Wall and Ceiling Contractors Alliance (SWACCA) for contributing to this blog.