1. What’s New?
- Starting January 1, 2025, the OBBBA (signed into law on July 4, 2025) introduces a new above-the-line federal deduction for qualified overtime compensation, valid through tax year 2028. This deduction is available regardless of taking the standard deduction or itemizing your qualifying expenses.
- Individuals can deduct up to $12,500/year, while joint filers can deduct up to $25,000 of overtime premium pay from federal taxable income.
2. What Counts as “Qualified Overtime”?
- Only the premium portion (e.g., the extra half-hour pay in “time‑and‑a‑half”) is deductible, not the entire overtime paycheck.
- The overtime must be paid under FLSA Section 7 and reported separately on a Form W‑2 (or Form 1099 for eligible contractors).
- Independent contractors generally do not qualify, since FLSA doesn’t require overtime coverage for them.
3. Who Qualifies?
| Eligibility Condition | Details |
| Filing Status | Available to both itemizers and standard deduction filers. |
| Taxpayer ID | Must include a valid Social Security Number; married individuals must file jointly if claiming the joint limit. |
| Income Limits | Phases out starting at $150,000 MAGI (modified adjusted gross income) for singles, $300,000 for joint filers. |
| Employment Classification | Must be non-exempt under the FLSA and receive overtime pay under law (excludes exempt salaried employees). |
4. Benefits & Limitations
- This deduction reduces taxable income, potentially lowering tax liability or increasing refundable credit, but does not eliminate payroll tax obligations (Social Security, Medicare).
- The benefit is more valuable in higher marginal tax brackets, though the MAGI phase-out limits mean some taxpayers may get reduced or no benefit.
- It provides a targeted relief that aims to reward workers who earn overtime without affecting payroll or FICA collections.
5. Practical Implications
- Employers should prepare to report qualified overtime separately and retain accurate records in 2025 and onwards.
- Employees should carefully track their premium overtime hours and confirm their income qualifies them under MAGI limits.
- Tax preparers need to understand AGI calculations, filing status requirements, and interaction with other temporary OBBBA deductions (like tips and auto loan interest).
- Some labor organizations, like the IAFF, have endorsed the provision for its benefit to public employees and shift workers.
⚖️ Summary Table
| Feature | Details |
| Who qualifies | FLSA-covered employees paid time‑and‑a‑half overtime |
| What’s deductible | Only the overtime premium portion up to $12,500/$25,000 |
| Income limits | Begins phasing out at $150K/$300K MAGI |
| Payroll tax | Still applies to overtime pay |
| Reporting requirements | Employers must include summary info on W‑2s or 1099s |
| Effective period | Tax years 2025 to 2028 |
Summary
- The OBBBA’s overtime provision is an above-the-line federal income tax deduction, not a payroll exemption.
- It provides relief for employees who regularly earn premium overtime, but only up to defined limits based on income and filing status.
- Employers and payroll systems should prepare for new reporting responsibilities in 2025.
- The real savings depend on tax rate and overtime volume; focus on potential tax savings rather than immediate withholding changes.
- State tax treatment varies; overtime deductions only apply at the federal level unless states conform in future legislation.