The introduction of the One Big Beautiful Bill Act (OBBBA) on July 4, 2025, brought about significant changes to tax deductions, including a new deduction for overtime pay. While this deduction doesn’t completely eliminate taxes on overtime earnings, it can result in more money in your pocket if you qualify.
The temporary deduction, effective for tax years 2025 through 2028, applies to overtime pay under section 7 of the Fair Labor Standards Act (FLSA), affecting approximately 143 million individuals. Taxpayers can deduct the portion of their pay that exceeds their regular pay rate, meaning that only the amount above the regular rate is deductible, with a maximum deduction of $12,500 for single filers and $25,000 for joint filers. The deduction phases out based on income level, starting at $150,000 for single filers and $300,000 for joint filers.
It’s important to note that the FLSA mandates at least minimum wage payment for all hours worked and overtime at time-and-a-half for hours exceeding 40 per week. However, there are exceptions to these rules, so it’s essential to understand your eligibility. Hourly employees and non-exempt employees are typically eligible to deduct their overtime, while most salaried employees do not qualify. Additionally, some state and other payroll taxes may still apply even if you are eligible for the federal tax deduction on overtime.
To claim the deduction, you’ll need to know how much overtime you worked and how much of that qualifies for the deduction. Employers are not required to separate overtime pay for tax year 2025, but they may choose to do so. You may find your overtime pay listed on a Form W-2, Form 1099-NEC, or Form 1099-MISC. The IRS allows taxpayers to use available information to estimate overtime for the year 2025.
For tax year 2026 and beyond, employers must include the total amount of qualified overtime on a Form W-2 or Form 1099. This means that 2025 is considered a transition year for this deduction. To claim the deduction, you’ll need to fill out a Schedule 1-A (Form 1040) and attach it to your tax return. If you itemize deductions, this schedule is in addition to a Schedule A.
Overall, the tax deduction for overtime provided by the OBBBA offers potential financial benefits to qualifying individuals. By understanding the eligibility criteria and following the necessary steps to claim the deduction, you can maximize the tax savings on your overtime earnings.
