On July 4, 2025, President Trump signed the One Big Beautiful Bill (OBBB) Act into law. The OBBB Act includes dozens of tax changes affecting individuals and businesses, including new provisions promised by President Trump during his 2024 campaign related to overtime pay. This provision introduces a significant change in federal tax treatment for overtime compensation, aiming to benefit millions of American workers.
Effective January 1, 2025, through December 31, 2028, eligible employees may deduct up to $12,500 in qualifying overtime pay from their taxable income, with married couples filing jointly eligible for up to $25,000. To qualify, individuals must be non-exempt W-2 employees earning qualified overtime. The deduction is available to taxpayers taking the standard deduction or the itemized deduction and phases out for higher earners starting at $150,000 for single filers and $300,000 for joint filers. Married taxpayers filing separately are not eligible.
“Qualified overtime compensation” is overtime paid to an individual required under the Fair Labor Standards Act of 1938 (FLSA) that is in excess of the regular rate under the FLSA at which the individual is employed. Under the FLSA, employers generally must pay covered, nonexempt employees at least one-and-a half times their regular rate of pay for hours worked over 40 hours a week at a given job. For example, an employee is paid $20 per hour. The qualified overtime eligible for the deduction is $10, the half amount paid over the regular rate.
Qualified overtime compensation does not include additional time paid via employer policy. Using the above scenario, the employer pays double time for working a holiday in excess of 40 hours. The employee will be paid $40 per hour for the double time, but the overtime eligible for the deduction will still be $10 as only time-and-a-half is required under the FLSA.
We are still awaiting guidance from the Internal Revenue Service related to overtime paid via employment contracts, state wage requirements, or prevailing wage rates as compensation under these scenarios may not be subject to the FLSA, but could still meet the FLSA requirements.
Qualified overtime pay must be included on the employee’s Form W-2, or the nonemployee’s Form 1099-NEC. In the case of qualified overtime compensation required to be reported for periods before January 1, 2026, persons required to file returns or statements may approximate a separate accounting of amounts designated as qualified overtime compensation by any reasonable method specified by the Secretary of the Treasury. The IRS has previously stated that they will not be updating the Form W-2 for 2025, but the draft 2025 form released added Code TT – Qualified overtime compensation to Box 12 for reporting purposes.
We encourage employers to begin preparing payroll systems to track and report qualifying overtime separately, and employees should consult with their tax advisors to understand how this provision may affect their 2025 tax filings.