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 overtime pay deduction.

The overtime pay deduction

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 $150,000 to $275,000 for single filers and $300,000 to $550,000 for joint returns.

For example, a single taxpayer with $10,000 of overtime pay and MAGI of $170,000 can deduct $8,000 of her overtime pay. $10,000 overtime pay minus $2,000, or ($170,000 – $150,000)/1,000*$100.

To receive the benefit, the following must be true.

• 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

5 tax tips to maximize the benefit

1. Track your overtime hours. This mid-year’s law change requires some historical research back to the beginning of the year. Get your payroll records and calculate your historical overtime hours and pay. You will need this to ensure that you receive credit for all your overtime pay.
2. Employers are in a jam. They must 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 release approved alternative reporting. This makes tracking your own overtime pay even more important, as it could become complicated in 2025.
3. Keep overtime, overtime. Congress is tasking the IRS and Treasury to implement controls to prevent work from being reclassified as overtime. You’ll want to ensure your overtime work is paid correctly and recorded, given the additional tax benefit.
4. Review your withholdings. With this additional deduction, you may be over-withholding your federal tax. Now is an excellent time for a review.
5. Pay attention to your state. Every state will need to determine whether it follows the new federal rules. Some will, some won’t, so stay alert.

Contact our RRBB advisors if you have any questions.