One of the basic principles of federal income taxation is that wages earned by employees are taxable at ordinary income rates unless a special tax law provision applies. But now there’s a new wrinkle. Under the One Big Beautiful Bill Act (OBBBA), employees can deduct overtime pay in certain situations—no questions asked!
[This is part of a Special Series on the tax changes made by the One Big Beautiful Bill Act, which was enacted in July 2025. It includes a wide range of changes to individual and corporate taxes, deductions, credits, forms and other topics, that affect tax filing starting this year into the future.]
But this new tax break is subject to dollar limits on your personal return. Plus, the deduction is phased out for certain high-income employees. Finally, the write-off is only temporary—it is scheduled to expire after 2028.
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Starting point: If an employee works more than 40 hours in a week, he or she must be paid “time-and-a-half” the regularly hourly rate, as mandated by the Fair Labor Standards Act (FLSA). For example, if an employee is paid $30 an hour and works 50 hours in a week, the employee’s overtime pay amounts to $450 (($30 + ($30×1/2)) x (50-40), or ($45 x 10)), before any payroll deductions are subtracted.
In contrast, “exempt employees” aren’t entitled to overtime pay. This includes employees who are paid an annual salary and who don’t meet established income levels. For 2025, employees who are paid more than a threshold of $1,128 per week and have jobs in executive, administrative, or professional capacities are generally classified as exempt employees. Thus, many small business owners aren’t covered by the FLSA overtime rules.
Similarly, workers who are classified as independent contractors aren’t entitled to overtime pay. This arrangement is often favorable to employers who can save on payroll taxes and the cost of expensive fringe benefits that must be accessible to employees.
In the past, employees would pay the required regular tax on overtime pay, minus various payroll deductions, and pocket the rest. But now the OBBBA provides a unique boost.
New law change: Beginning in 2025 you can deduct a portion of your overtime pay for the year, up to $12,500 for single filers and $25,000 for joint filers. This change is retroactive to amounts earned on or after January 1, 2025. Note, however that the deduction is only available for the “premium” portion of overtime pay based on the extra rate (i.e. the amount of pay that exceeds the normal hourly rate). Going back to our previous example, the employee can deduct the extra $150 ($15 x 10 hours).
Also, the deduction is phased out based on your modified adjusted gross income (MAGI).
The phase-out begins at $150,000 of MAGI for single filers and $300,000 for joint filers. (These thresholds are not indexed for inflation.)
Once you exceed threshold, the deduction is reduced by $100 for each $1,000 above the threshold. So high-income employees may receive little or no tax benefit from this new rule. The phase-out for a single filer is complete at $275,000 of MAGI; the phase-out for a married filing joint taxpayer is complete at $550,000.
Absent any extensions, the overtime pay deduction is set to expire in 2029. Congress may revisit the issue prior to that deadline.
Bottom line: Both employers and employees should consider the repercussions of these new rules. It may warrant a fresh look at the classification of certain workers and the structure of compensation agreements. Ast the very least, it will require payroll adjustments. In most instances, it’s best to work out the particulars with a professional tax advisor.
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LENNY RICH October 8 2025 at 5:27 pm
If you leave out the BS in the report you come down to the Trump Tax Break will go to the persons who need it "LOW INCOME EARNERS".