Are You Prepared to Help Your Employees Take Advantage of the Tax Deduction for Overtime Compensation for Tax Year 2025?

During the Presidential campaign and the subsequent Sunday talk shows leading up to the One Big Beautiful Bill (“BBB”), American voters heard that overtime (“OT”) compensation will be tax free. Now that the legislation has passed, that’s only “kinda sorta” true.

• No wages are exempt from taxation, so payroll deductions on OT will continue, and that means weekly paychecks will not increase due to the BBB.
• The BBB allows for a deduction to be taken on employee tax returns for the OT premium – an hourly wage of $20 has an OT premium of $10. Only the $10 may be deducted.
• The deduction is capped: $12,500 for single filers, $25,000.00 for married filers.
• Only FLSA qualified OT is eligible for the deduction. State laws with OT after 8 hours, company paid OT not required by federal law and similar OT opportunities paid pursuant to a contract or collective bargaining agreement are not eligible for the deduction.

The BBB and this exemption apply to tax year 2025. However, the IRS is not changing the 2025 W-2 reporting statement and the burden of identifying deductible OT wages is solely on the employee filer. For some employers, this may be as simple as looking at a final paystub. But if you pay OT for any reason other than federal FLSA eligible overtime, your employees will want to know the difference and will logically ask you for help.

Kudos to any employer who saw this coming. Most did not. Therefore, as employee year-end tax statements come due in January 2026, employers should consider compiling the FLSA eligible OT amounts and be ready to distribute to employees, allowing them to submit this data to their tax preparers and reap the benefit the BBB was intended to deliver “after the vote.” The IRS will issue guidance for 2026, and we believe W-2 forms will change for that tax year. Accordingly, employers should be accurately tracking FLSA overtime in 2026.

If you have any questions, contact your Dinsmore attorney or David Shankman and Michael Willats in the Firm’s Tampa office or Kelsey Scherr in Los Angeles.