Aug 27, 2025

Understanding the New Tax Break for Overtime Pay

Thanks to a new federal income tax deduction provided by the One Big Beautiful Bill Act, many workers who put in extra hours will be able to keep more of their earnings. Read through to see who qualifies, how much could be saved and what the limits are.

 

By law, nonexempt employees — whether paid hourly or salaried — must be paid at least 1.5 times their regular rate of pay for all hours worked over 40 in a workweek. The One Big Beautiful Bill Act introduces a tax break for certain workers who earn overtime, using an above-the-line deduction.

An above-the-line deduction reduces your taxable income before adjusted gross income is calculated, and you can claim it even if you take the standard deduction instead of itemizing.

Who qualifies

To qualify, employees must:

  • Be classified as nonexempt under the Fair Labor Standards Act.
  • Work more than 40 hours per workweek at a rate of at least 1.5 times their regular pay.
  • Have a Social Security number and be legally authorized to work in the U.S.
  • File jointly if married.

Hourly employees in fields such as nursing, law enforcement and emergency response are expected to be among the main beneficiaries.

How the deduction works

Qualified overtime compensation is the amount paid above an employee's regular rate of pay. The maximum annual deduction is $12,500 ($25,000 for joint filers). It phases out by $100 for every $1,000 of modified adjusted gross income above $150,000 ($300,000 for joint filers). This provision applies to tax years 2025 through 2028.

Any qualified overtime must be reported to employees on Form W-2, Form 1099 or other acceptable tax statement. Employers must report the same total to the IRS. For 2025, the IRS will offer transition relief for both taxpayers and employers subject to the new reporting requirements.

Overtime wages will still be subject to withholding, but employees can deduct the federal income taxes paid on those wages when filing their returns. Payroll taxes for Social Security and Medicare will still apply.

Only FLSA-required overtime is deductible; state-only or contractual overtime is not.

Potential impacts

The White House estimates the average overtime worker could save between $1,400 and $1,750 annually. However, the tax deduction is unlikely to benefit individuals at lower earned income levels.

Some analysts warn that removing income tax on overtime could shift labor patterns by encouraging more employees to work extra hours, potentially making those roles more appealing than exempt positions.

As this is a new law, there may be confusion regarding eligibility and reporting. Employees should consult a qualified tax professional to be sure they meet all requirements.

  ©2025


 

MORE RECENT NEWS…


Sep 25, 2025

Social Security Fairness Act and Your Benefits

The Social Security Fairness Act repeals two long-standing rules that reduced Social Security benefits for many government and public sector workers. Read through to learn more about the act and whether these changes affect you.


Sep 24, 2025

Welcome Aboard: Tips for Successful Employee Onboarding

Congratulations! You've finally completed the demanding hiring process and you've made the right hire. You are now ready to welcome a new member to the team. Read through for some pro tips on best onboarding practices for the first day at work and beyond.


Sep 23, 2025

What Are the Best Payroll Practices?

Are you curious about the idea of a streamlined payroll process? It's a great way to make sure your entire payroll department is on the same page and operating with the same standards in mind. Read through for insights into the best payroll practices.


Sep 22, 2025

Know the Rules for Reimbursing Employees

When reimbursing employees for work-related expenses, are you using an accountable plan or a nonaccountable one? The difference affects how you report the payments and how your employee is taxed. Read through to learn the IRS rules and how to stay compliant.


Aug 29, 2025

Silver Workers: No Substitute for Experience

Once, employees approaching retirement age could look forward to a long, relaxing post-work life. For much of the 55+ crowd, this is no longer the case, with many forestalling retirement for as long as possible. Read through for advice on employing silver workers in your organization.


Aug 28, 2025

Show Me the Money: Creating a Salary Policy

For any company to treat their employees with respect and fairness, it needs to have a transparent pay equity policy in place that is shared with all employees. Read through to understand why creating pay equity is beneficial to your organization.




More News & Press can be found in our Archive.