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THE “ONE BIG BEAUTIFUL BILL ACT” BRINGS OVERTIME TAX DEDUCTIONS
On July 4, 2025, H.R. 1, the “One Big Beautiful Bill Act” (the “OBBBA”) was enacted by Congress introducing significant tax changes for American taxpayers. One prominent change is the new tax deductions available for employees earning overtime pay.
What Income is Subject to Deduction?
Under the OBBBA, employees may now deduct the premium portion of overtime pay up to $12,500 per year for individuals and $25,000 for those filing jointly. The premium portion of overtime pay is the extra amount above the regular hourly rate. Importantly, the deduction is limited to premium pay that is statutorily required under Section 7 of the Fair Labor Standards Act. Any overtime compensation paid pursuant to heightened state-law requirements or negotiated under collective bargaining agreements do not qualify for the deduction.
For example, if an employee’s regular rate of pay is $10.00 per hour and earns $15.00 per hour while working overtime, the employee’s premium portion of the overtime is $5.00 ($15.00 - $10.00 = premium portion). Therefore, the employee is permitted to deduct the premium portion from their income taxes. However, the deduction is reduced when the individual’s modified adjusted gross income (“MAGI”) exceeds $150,000 ($300,000 in the case of a joint return) and overtime wages are still subject to Social Security, Medicare, and any other applicable state and local taxes on overtime.
How Does this Impact Employers?
At the time the OBBBA was enacted, there was very little guidance on what an employer is required to do to comply with the OBBBA. Fortunately, on November 5, 2025, the Internal Revenue Service (“IRS”) issued Notice 2025-62 (“Notice”) providing penalty relief to employers for tax year 2025 relating to the new reporting requirements for qualified overtime compensation under the OBBBA. According to the Notice, the IRS will not impose a penalty if an employer fails to separately provide a written statement of the total amount of qualified overtime compensation. This allows organizations additional time to adjust to the significant reporting changes and develop the systems or procedures necessary to correctly file with the IRS.
Although organizations can avail themselves of the penalty relief for not reporting qualified overtime compensation on the relevant Forms W-2 and/or 1099 for tax year 2025, employees are still able to claim the deduction for the 2025 tax year. As such, employers are encouraged—but not required—to provide employees with separate accounting of overtime compensation to allow the employee to claim their deductions on their federal income tax return. Individuals who are not furnished with a separate accounting of overtime may use documentation such as pay statements in calculating their 2025 overtime premium.
For tax years beginning in 2026, the IRS has indicated that a revised W-2 will be implemented that that includes a dedicated reporting section for employers to input an employee’s qualified overtime. Until then, an employer that wishes to report qualified overtime may do so by entering the qualified overtime in Box 14 of the current Form W-2 or provide employees with their qualified overtime hours in an alternative written statement.
In the meantime, the IRS recommends employers update their payroll and internal reporting processes to prepare and accommodate for overtime reporting requirements beginning in tax year 2026. If your organization utilizes a payroll processing company, the employer should connect with them to ensure they will provide proper reporting services. The IRS further recommends employers continue to monitor IRS website for updates and guidance to ensure ongoing compliance.
Our firm is available to assist with this process to ensure compliance and mitigate any potential risks. Please contact Attorney Alyssa M. Knappins at aknappins@rbslaw.com if you have further questions or wish to discuss.