by The budget bill signed into law on July 4, 2025, known as the “One Big Beautiful Bill Act“ (the Act), will have a significant impact on taxpayers and employers in various ways. While some industries will have several policy and practice changes to consider, Section 70202 of the Act introduces a change that will affect most, if not all, taxpayers and employers subject to the overtime provisions of the Fair Labor Standards Act (FLSA). It creates a tax deduction for overtime compensation paid to an individual under the FLSA that is in excess of the employee’s regular rate of pay. In other words, the deduction applies to the amount of the overtime premium that is required by the FLSA over the regular rate. The overtime pay deduction takes effect for the 2025 tax year and is set to expire after the 2028 tax year.
The Deduction
The Act outlines several conditions for eligibility for the tax deduction:
- It is capped at $12,500 for taxpayers with an adjusted gross income of $150,000 or less in any taxable year.
- The cap is reduced by $100 for each $1,000 by which the taxpayer’s adjusted gross income exceeds $150,000.
- Both the cap amount and the adjusted gross income limits differ for taxpayers filing jointly.
- The deduction does not apply to overtime payments that are not “required” by the FLSA, such as holiday or shift premiums or overtime paid under individual contracts, collective bargaining agreements, or solely due to state law.
Employer Obligations
- Employers will need to include the total amount of qualified overtime compensation as a separate line item on the Form W-2.
- For 2025, the employer will be able to approximate the amount designated as qualified overtime compensation using a method to be specified by the U.S. Treasury Secretary.
Details on both taxpayer and employer obligations are expected to be forthcoming from the IRS in the upcoming months.
