Big Beautiful Bill Overtime Tax: The Real Story 

If you’ve been hearing about the “no tax on overtime” benefit in the One Big Beautiful Bill Act, here’s the real story. The Big Beautiful Bill overtime tax deduction gives qualified workers a break on part of their overtime pay for the years 2025 through 2028. 

It’s one of the most talked-about provisions of the new law, but it’s also one of the most misunderstood. Let’s unpack how it works, who qualifies, and what business owners and workers need to do to take advantage of it. 

What Is the Big Beautiful Bill Overtime Tax Deduction? 

The One Big Beautiful Bill Act (OBBBA), signed on July 4, 2025, created a new federal income tax deduction for qualified overtime compensation. 

In plain English: 

• You can deduct a portion of your overtime pay from your taxable income. 

• The deduction applies to overtime earned after December 31, 2024, and can be claimed on returns for 2025 through 2028. 

• The intent is to allow employees and certain self-employed individuals keep more of what they earn when they put in extra hours. 

When Does the Overtime Deduction Start and End? 

The deduction applies to tax years beginning after December 31, 2024, which means it starts with the 2025 tax year (filed in 2026). 

It’s available for four years: 2025, 2026, 2027, and 2028. Unless Congress acts to renew or extend the provision, it’s scheduled to expire after December 31, 2028. 

What Counts as “Qualified Overtime Compensation”? 

Not all overtime pay is created equal. Under the law, qualified overtime compensation means the “extra half” you earn when you’re paid time-and-a-half for working more than 40 hours in a week under the Fair Labor Standards Act (FLSA). 

Here’s the breakdown: 

• If your regular rate is $20 an hour and you work 45 hours, you’re owed $30 per hour for the extra five hours. 

• Only the extra $10 per hour (the half-time premium) counts as qualified overtime for this deduction. 

• The qualified amount must be reported by your employer on your W-2 (Box 14) or by your payer on a 1099 or other specified statement. 

• Tips don’t qualify, even if you usually report them as income. 

This distinction matters because the deduction is based only on the overtime premium, not your total overtime pay. Talk to a CPA to ensure that you maximize your tax deduction.  

How Much Can You Deduct? 

The Big Beautiful Bill sets specific overtime taxes deduction limits and phase-out thresholds for single and married filing jointly: 

If your modified adjusted gross income (MAGI) exceeds the threshold, your deduction is reduced by $100 for every $1,000 (or part thereof) over that limit. 

This deduction is available whether you itemize or take the standard deduction, but married couples must file jointly to qualify. You’ll also need to include a valid Social Security Number on your return. 

Who’s Eligible Under the Big Beautiful Bill Overtime Rules? 

To qualify, you must: 

• Receive overtime pay required under FLSA section 7, meaning hours worked over 40 in a week for a non-exempt employee. 

• Have the overtime premium properly reported on a W-2 or 1099. 

• File jointly if married and include a valid Social Security Number. 

The law even allows certain self-employed individuals to claim the deduction, as long as the overtime pay meets the FLSA definition and is reported correctly. 

And these are not eligible: 

• Overtime that’s not required under FLSA (for example, contractual or voluntary “extra pay” arrangements). 

• Tip income. 

• Overtime earned by married taxpayers filing separately. 

Reporting and Documentation Requirements 

Employers and payors play an important role in helping employees claim this deduction correctly. Here’s how it works for different roles.

Employers

• Qualified overtime must be reported separately on W-2 (Box 14) or a similar statement. 

• Information returns must also be filed with the IRS or SSA reflecting those amounts. 

• The IRS has granted penalty relief for 2025 if an employer cannot separate overtime reporting yet, as long as the rest of the filing is complete and accurate. 

Non-employees (contractors or other payors)

• Qualified overtime must be reported on a 1099 or another designated form. 

Workers

• Keep records of hours, rates, and overtime premiums. 

• Make sure your W-2 or 1099 includes the correct reporting. 

• Confirm that your pay actually meets the FLSA definition of required overtime. 

A proactive CPA will help you with a seamless and compliant strategy, handling all the complexities for you. Contact a Proactive CPA now. 

How Does the Overtime Deduction Helps You 

If you regularly work extra hours, this deduction can meaningfully reduce your federal income tax bill. For an example, you earn $10,000 in qualified overtime for 2025 and fall in the 22 percent federal bracket. Your potential savings could be $2,200 on federal income tax alone. 

That’s not including the added benefit of increasing your after-tax take-home pay each pay period. 

Here are key things to keep in mind: 

• The deduction only applies to federal income tax; it doesn’t exempt overtime from Social Security, Medicare, or state income tax. 

• You’ll still see those withholdings taken from your paycheck — just like your regular wages. The same FICA (Social Security and Medicare) and state tax rates continue to apply to overtime earnings. 

• Because the deduction is claimed on your tax return, your employer’s payroll system won’t automatically withhold less during the year. In other words, you’ll likely see the benefit at tax time, not on each paycheck. 

• Once you file, the deduction reduces your taxable income, which can result in a larger refund or lower tax due, depending on your overall tax situation. 

That means, your paycheck withholdings won’t change, but your federal taxable income will. That gives you a meaningful tax break when you file. 

What to Expect Next 

The IRS is expected to release additional instructions on how to claim the overtime deduction on 2025 tax returns. 

For now: 

• Employers have transition relief for 2025; no penalties if they can’t separate overtime reporting right away. 

• Employees should start tracking overtime hours and verifying how it’s listed on their pay stubs and W-2s. 

• Business owners should check with their payroll providers to ensure systems are ready for 2025. 

The Big Beautiful Bill overtime tax deduction is one of the most significant middle-income tax changes of this decade. It rewards hard work, but like most tax breaks, it comes with fine print. 

If you earn overtime or if your business pays it, now’s the time to prepare your payroll systems, track hours accurately, and understand how to report qualified overtime correctly. 

Want to get a proactive tax strategy? Attracct Advisors can help you plan ahead, set up compliant reporting, and ensure you get the maximum tax benefit. Contact us.