JJ THE CPA
OBBBA:
No Tax on Overtime
Up to $12,500 Per Person Tax Deduction
By Joshua Jenson, CPA (JJ the CPA)
With the One Big Beautiful Bill Act (OBBBA), there is a new provision: "No Tax on Overtime!" However, take note this is really is a new tax deduction. All overtime must still be fully reported as income, and then, up to that overtime income, no more than $12,500 per person, a tax deduction is available. One of the most important aspects to know is that only the "half" amount of the "time and a half" compensation is included in the deduction. Also, only qualified employees who are paid the required overtime compensation mandated by Section 7 of the Fair Labor Standards Act (FLSA) are to be included. There are several additional factors to consider. The first important aspect to grasp is that this is a "below the line" tax deduction, which means it is available regardless of whether the standard deduction or itemized deductions are taken.
CLICK HERE to check out the 3.5 Hr seminar plus 300+ page PowerPoint
Here is what is covered in detail in the tax seminar:
Up to $12,500 Deduction on Overtime
•Starting in 2025 through 2028, for qualified overtime compensation.
•The deduction only includes 0.5 of the 1.5 times the regular rate for hours worked over 40 per week, as required under the Fair Labor Standards Act (FLSA).
-Example: $10/hour base → $15/hour OT rate → Only the $5/hour is includible in the “no tax on overtime” deduction
-FLSA defines 'overtime compensation' as the total 1.5 times rate, but only requires the .5 times rate to be added, as the employee still would be paid their hourly rate.
•Overtime wages and compensation for W-2 and 1099 (per IRS) are still reportable income
•To be tracked and reported separately on Forms W-2 and 1099 starting for tax year 2026.
•Only qualified employees who are paid the required overtime compensation mandated by Section 7 of the Fair Labor Standards Act (FLSA) are to be included.
•Separately stated “below-the-line” deduction
-A taxpayer can either take the standard deduction or itemize deductions
•This will only save federal income tax
–Does not exempt the overtime pay from payroll or self-employment taxes (per IRS)
Phases out for taxpayers with MAGI over $150,000 ($300,000 MFJ)
•Deduction is per taxpayer, per year
–Maximum deduction of $25,000 for MFJ
-MFS results in zero deduction. Requires, if married, to file MFJ
• Single — $12,500 deduction
• Head of Household — $12,500 deduction
• Married Filing Jointly (MFJ) — $25,000 combined (not $25K per spouse)
-Still limited to $12,500 Per Spouse
• Qualifying Widow(er) — $12,500 deduction
• Married Filing Separately (MFS) — $0 deduction allowed
⚠️ No partial credit for MFS — it’s all or nothing, and MFS gets nothing
Employees in nonexempt roles (as defined by the FLSA) can now deduct up to $12,500 of federally taxed overtime pay — or $25,000 for joint filers. This provision applies to any qualifying employee who receives overtime pay required by law at 1.5× their normal rate for working more than 40 hours in a week.
• Must be classified as a FLSA nonexempt employee
• Must be paid overtime at 1.5× rate for hours over 40 per week
• Employer must report qualified overtime separately on Form W-2 starting in 2026
• Employer still withholds and matches Social Security and Medicare (FICA)
• Deduction applies only to federal income tax, not payroll taxes
Not everyone is eligible for the OBBBA overtime deduction. The law targets working-class, hourly employees covered under the Fair Labor Standards Act. If you’re exempt from FLSA or earn above certain thresholds, you’re out.
Here’s who does NOT qualify:
• Exempt employees under FLSA — even if paid overtime voluntarily
• Highly Compensated Employees (HCEs) — over $160,000 prior-year income
• 5%+ owners
• Employees whose overtime is not required under FLSA (e.g., salaried)
• Workers who exceed phase-out limits: $275K (single), $550K (joint)
• Anyone whose employer does not report overtime separately on W-2
• Contractors or gig workers (1099s) — unless later updated by IRS
