With the passage of the One Big Beautiful Bill Act (OBBBA) of 2025, there's the ability to receive a deduction for overtime pay from your federal tax obligation. Here's a recap of the rule and several tax tips to ensure you receive the full benefit of the deduction.
The Tax Law Change
From 2025 through 2028, there is a new above-the-line tax deduction of up to $12,500 ($25,000 for joint filers) for qualified overtime compensation. Overtime is the half portion of being paid time-and-a-half as defined by the Fair Labor Standards Act. The benefit begins to phase out when your modified adjusted gross income exceeds $150,000 ($300,000 for joint filers). It phases out by $100 for every $1,000 you exceed the amount. So the phaseout ranges are:
π€ Single: $150,000 β $275,000
π₯ Joint filer: $300,000 β $550,000
Example:
Ima Working, a single taxpayer with $10,000 of overtime pay and modified adjusted gross income (MAGI) of $170,000, may deduct $8,000 of her overtime pay. Her deduction is reduced by $2,000 because her MAGI exceeds $150,000.
Calculation:
$10,000 β (($170,000 β $150,000) Γ· 1,000 Γ $100) = $8,000
To receive the benefit:
- You must have a valid, work eligible, Social Security number
- The overtime is to be designated on a W-2 (or a 1099 in the case of contract labor overtime)
- If married, you must file a joint tax return
Some Tips
- Track your overtime hours. This mid-year's law change requires some historic research back to the beginning of the year. Get your payroll records and add up your historic overtime hours and pay. You will need this to ensure you are getting credit for all your overtime pay.
- Employers are in a jam. They are required to report these overtime hours on a W-2 or similar form. But the form does not yet have the overtime reporting mechanism. So what to do? Congress has established a reporting transition rule for 2025 and the IRS will come out with approved alternative reporting. This makes tracking your own overtime pay even more important, as this could be messy in 2025.
- Keep overtime, overtime. Congress is tasking the IRS and Treasury to put controls in place to ensure work is not reclassified as overtime. You'll want to ensure your overtime work is properly paid and recorded given the additional tax benefit.
- Review your withholdings. With this additional deduction, you may be over-withholding your federal tax. Now is a great time for a review.
- Pay attention to your state. Every state will need to determine whether they follow the new federal rules. Some will, some wonβt, so stay alert.