August 13, 2025
The One Big Beautiful Bill (OBBBA) allows qualifying taxpayers to deduct up to $12,500 (single) or $25,000 (married filing jointly) of their overtime premium pay. That’s the extra half-time rate paid when employees work over 40 hours a week. This deduction is available from 2025 through 2028 and reduces federal taxable income whether or not the taxpayer itemizes.
Who Qualifies?
To qualify, a taxpayer must:
- Have earned overtime premium pay (the extra 50% beyond their normal hourly rate).
- Have MAGI under $150,000 (single) or $300,000 (married filing jointly). Deduction phases out above these thresholds.
- File with a valid SSN.
How It Works
- Overtime premium pay is tracked separately.
- When filing taxes, the employee deducts the eligible amount (up to the cap).
- The deduction lowers federal income taxes but not FICA (Social Security/Medicare) or most state taxes.
- Employers must properly report the premium portion on W-2s (or 1099s) so the IRS can verify the deduction.
What Business Owners Need to Know (and Do)
This deduction isn’t just a perk for employees, it puts new compliance obligations on employers.
Here’s what employers must pay attention to:
1. Accurate Overtime Classification Is Non-Negotiable: Make sure employees classified as non-exempt are actually non-exempt under the Fair Labor Standards Act (FLSA). Misclassification is now not just a wage violation—it can create a tax reporting headache and trigger audits.
2. Track Overtime Premium Separately: You must break out the premium portion of overtime wages (the extra 50%) from base pay. This needs to be clearly documented in your payroll system.
Example: If an employee earns $20/hour and works 10 overtime hours, they make $300 for those hours. But only $100 (the half-time premium) qualifies for the deduction and should be broken out.
3. Update Payroll and Reporting Systems: If your payroll software doesn’t automatically track and flag overtime premiums separately on the W?2, now’s the time to update. By the 2025 filing season, employers will need to provide Box 14 or supplemental statements showing this detail.
4. Communicate with Employees: Educate your team. Let them know this benefit exists and explain how your payroll reports it. The more proactive you are, the less likely you’ll field panicked calls during tax season.
5. Work with Your Accountant: Make sure your accounting team understands these new requirements. Talk to your payroll provider about how the overtime premium will be recorded and what needs to be included with year-end statements.
Real-Life Example: Overtime Deduction in Action
Jordan, a warehouse employee, earns $20/hour and works 10 hours of overtime each week.
That’s $30/hour for overtime, so:
- Base Pay (40 hrs): 40 x $20 = $800
- Overtime Pay (10 hrs): 10 x $30 = $300
- → of which $200 is base, and $100 is the premium
Jordan earns $13,000 in overtime premium pay over the year. Jordan’s MAGI is $80,000, so the full $12,500 deduction applies.
This lowers Jordan’s taxable income by $12,500, saving roughly $2,750 in federal income taxes (assuming a 22% rate).
What’s the Bottom Line?
For employees, this is a meaningful deduction that encourages extra work without extra federal tax. For employers, it’s a compliance minefield if you don’t get the payroll reporting right.
If you’re a business owner, this is your nudge to talk to your Faw Casson advisor now. Nail down your systems, train your staff, and make sure W-2s are crystal clear. Trust us; your team will thank you in April.
Faw Casson is here to help businesses and employees make the most of the new OBBBA provisions. Reach out before you hit the busy season.