The One Big Beautiful Bill Act (OBBBA) recently introduced a temporary federal income tax deduction popularly known as No Tax on Overtime. However, the actual mechanics of the law are specific: eligible taxpayers can claim a deduction for the overtime premium portion of their pay, which is the extra amount earned above their regular hourly rate.
This deduction is available for tax years 2025 through 2028. Here is a breakdown of how it works and whether you qualify.
What is Qualified Overtime Compensation?
The IRS defines qualified overtime compensation as pay required under Section 7 of the Fair Labor Standards Act (FLSA) that exceeds an employee’s regular rate of pay.
In plain English:
The Half Qualifies: If you are paid time-and-a-half, the 1.0 (your base rate) remains taxable. Only the 0.5 premium generally qualifies for the deduction.
Double Time: If an employer pays double time, the deductible amount is still tied to the portion that meets FLSA requirements; it is not automatically the entire amount above base pay.
Calculation Example: If your regular rate is $20 per hour and your overtime rate is $30 per hour, your premium is $10 per hour. If you worked 100 overtime hours in 2025, your qualified overtime deduction would generally be $1,000 (100 hours × $10), subject to income limits and phaseouts.
Eligibility: It is About the FLSA, Not Your Job Title
This deduction is strictly tied to FLSA Section 7 eligibility. To qualify, a worker must be classified as non-exempt.
If you are exempt under the FLSA, you generally do not have qualified overtime compensation for this deduction, even if your employer uses the word overtime in a private contract or company policy.
Who Typically Qualifies?
You are likely in the qualified category if you are a W-2 employee, your hours are tracked, and you receive mandatory overtime pay for working more than 40 hours in a workweek. Common roles include:
Retail and Hospitality: Cashiers, kitchen staff, and shift-based hotel roles.
Manufacturing and Logistics: Warehouse associates, machine operators, and assemblers.
Construction and Trades: Electricians, plumbers, HVAC technicians, and field crews.
Healthcare: Many non-managerial nursing and support roles.
Practical Tip: If your paystub explicitly shows overtime at 1.5× and you are a non-exempt hourly worker, you are the primary intended audience for this deduction.
Who Typically Does Not Qualify?
Many salaried employees are exempt from FLSA overtime rules, particularly those under the Executive, Administrative, or Professional (EAP) exemptions. This often includes:
Management: Roles with authority over hiring, firing, and department direction.
High-Level Admin: Roles requiring significant independent judgment and discretion.
Outside Sales and Specialized IT: Certain computer-related occupations and sales roles have specific exemption criteria.
Note: Being paid a salary does not automatically make you exempt. Some salaried workers are non-exempt and may still qualify if their duties fall under FLSA protections.
Limits and Income Phaseouts
The IRS has established specific guardrails for this deduction:
Timeline: Applicable for tax years 2025 through 2028.
Annual Caps: Maximum deduction of $12,500 per return or $25,000 for Married Filing Jointly.
Income Phaseouts: The deduction begins to phase out once Modified Adjusted Gross Income (MAGI) exceeds $150,000 or $300,000 for Married Filing Jointly.
Accessibility: This is an above-the-line style deduction, meaning it is available whether you take the standard deduction or itemize.
Recordkeeping for the 2025 Tax Year
For the 2025 transition year, not all employers will have Qualified Overtime neatly labeled on Form W-2.
In practice, many taxpayers will need to rely on payroll details such as end-of-year paystubs, YTD summaries, or payroll portal exports to support and calculate the deduction accurately.
Minimize your tax liability with TS CPA
Calculating the exact premium portion of your pay across different shifts and pay cycles can be complex. At TS CPA, we provide the expertise needed for accurate tax filing to ensure you maximize this new deduction while minimizing your overall tax liabilities. We can verify your FLSA status and calculate your maximum allowable deduction to keep your filing compliant and efficient.
Would you like us to review your eligibility? Reach out to us with a recent paystub and your year-to-date earnings summary. We will help you determine exactly how much you can save this tax season.