By law, nonexempt employees — whether paid hourly or salaried — must be paid at least 1.5 times their regular rate of pay for all hours worked over 40 in a workweek. The recently passed Big Beautiful Bill introduces a tax break for certain workers who earn overtime, using an above-the-line deduction.  An above-the-line deduction reduces taxable income and can be claimed even by anyone – even those who take the standard deduction rather than itemizing.

To qualify for this deduction, employees must:

• Be classified as nonexempt under the Fair Labor Standards Act.
• Work more than 40 hours per workweek at a rate of at least 1.5 times their regular pay.
• Have a Social Security number and be legally authorized to work in the U.S.
• File jointly if married.

Here’s the DETAILS about how it works…

• Qualified overtime compensation = the amount paid above an employee’s regular rate of pay.
• Maximum annual deduction = $12,500 ($25,000 for joint filers).
• Phase Outs = The deduction phases out by $100 for every $1,000 of modified adjusted gross income above $150,000 ($300,000 for joint filers).
• Application Period = Tax years 2025 through 2028.
• The Employer’s Responsibility = to report any qualified overtime on the employee’s Form W-2, 1099 or other acceptable tax statement. They must also report that same number to the IRS.
• Required Withholdings = on all overtime wages.  Payroll taxes paid by employers for social security and medicare do not change. 
• Allowable Deductions = The federal income taxes paid by employees on over time wages will be recognized on their tax return not at point where the overtime occurred or taxes paid. Only FLSA-required overtime pay is deductible. 

Potential Impact?

• The current administration estimates that the average overtime worker (which includes several high per hour earners in the nursing or public service sector) could save between $1,400 and $1,750 annually. The benefit to individuals at lower earned income levels will be less.
• Look for potential shifts in workforce management.  Employees may be encouraged to work extra hours because of the new incentives to do so. 
• Hourlie non exempt roles with lots of overtime can start to look a whole lot more appealing than exempt roles who do not qualify for overtime.