The One Big Beautiful Bill: How Overtime Pay Is Changing

The House bill introduces a provision that would let eligible taxpayers claim an above-the-line deduction for the amount of qualified overtime compensation earned during the year. Qualified overtime refers to the portion of overtime pay that exceeds the employee’s regular hourly rate, as defined under section 7 of the FLSA.

This deduction does not apply to qualified tips or compensation received by highly compensated employees. To qualify, the overtime amount must be separately reported on Form W-2.

The recently passed One Big Beautiful Bill introduces major updates to how overtime pay is taxed. These changes could directly impact your paycheck and your overall tax liability, so it’s important to understand the new rules.

Under the bill, qualified overtime compensation will be excluded from federal income tax. However, it will still be subject to FICA taxes (Social Security and Medicare).

• The exclusion is capped at $12,500 for single filers and $25,000 for joint returns.

• This benefit applies for tax years 2025 through 2028.

• The deduction is available to both itemizers and non-itemizers, though income limitations may apply.

• The overtime deduction begins to phase out once your modified adjusted gross income (MAGI) exceeds $150,000 for single filers and $300,000 for married filing jointly.

Example:

Let’s say you work 100 hours of overtime in a year.

Your regular rate is $20/hour.

Overtime is paid at 1.5x, or $45/hour.

The difference between your overtime rate and your regular rate is $15/hour.

Multiply this difference by 100 hours, and you get $1,500 in qualified overtime compensation.

That $1,500 would be excluded from federal income tax, effectively reducing your taxable income and lowering your tax bill.

By excluding part of your overtime pay from federal income tax, this new rule helps working individuals keep more of their hard-earned money. However, since it’s subject to FICA taxes and capped at certain limits, careful planning is essential to maximize the benefit.

The overtime provisions in the One Big Beautiful Bill could mean meaningful tax savings for many workers. But every taxpayer’s situation is unique — income levels, filing status, and other deductions can all affect how much benefit you’ll actually see.

This article provides a general overview of the changes. For advice tailored to your specific circumstances, we encourage you to reach out to our office. We’ll be happy to review your situation and help you plan for the best possible tax outcome.

The One Big Beautiful Bill: How Overtime Pay Is Changing