EMDA Platinum Member Moore Colson introduces-How to Calculate Your Overtime Deductions for 2025
The One Big Beautiful Bill Act (OBBBA) creates new income tax deductions for tax years 2025 through 2028 for qualified overtime compensation. If you receive overtime pay, you likely have questions about whether you’re eligible for a deduction and how big it might be.
The IRS has issued guidance on how workers can determine the amount of their deductions for 2025, because employers aren’t required to provide detailed information on overtime compensation until the 2026 tax year. Here’s an overview of what you need to know.
THE NEW DEDUCTION
Rather than eliminating taxes on all overtime compensation, the OBBBA establishes partial deductions available to both itemizers and nonitemizers, subject to income-based limitations. Qualified overtime compensation remains subject to federal payroll taxes and state income and payroll taxes where applicable. Moreover, because the tax breaks are in the form of deductions claimed at tax time, employers must continue to withhold federal income taxes from employees’ paychecks.
The overtime deduction is limited to $12,500, or $25,000 if you’re a joint filer. A phaseout begins if your MAGI exceeds $150,000, or $300,000 if you’re a joint filer. The deduction is completely phased out if your MAGI reaches $275,000, or $550,000 if you’re a joint filer.
The overtime deduction is available for overtime pay required by the Fair Labor Standards Act (FLSA), which generally mandates “time and a half” for hours that exceed 40 in a workweek. Notably, though, the deduction applies only to the pay that exceeds the regular pay rate — that is, the “half” component.
Because the FLSA definition of overtime varies from some state law definitions, overtime pay under state law might not be deductible. And the deduction doesn’t apply to overtime paid under a collective bargaining agreement or that an employer pays more than time-and-a-half (for example, double time).
THE OVERTIME DEDUCTION CALCULATION
Employers won’t be required to include eligible overtime pay on Form W-2 until the 2026 tax year. So, for 2025, if you’re an employee, you can self-report your overtime compensation for the overtime deduction.
According to the IRS, you must make a “reasonable effort” to determine whether you’re considered to be an FLSA-eligible employee. The IRS says this may include asking your employers or other service recipients about your FLSA status.
To calculate the deduction amount, you must use “reasonable methods” to break out the amount of overtime pay that qualifies. For example, if you were paid time and a half and receive a statement with your total amount for overtime (regular wages plus the overtime premium), then you can use one-third of the total. If you were paid double time and receive such a statement, you can multiply the total dollar amount by one-fourth to compute the qualifying overtime pay.
A TAX-SAVING OPPORTUNITY
If you might be eligible for the overtime deduction, don’t miss out on this tax-saving opportunity just because your deduction may be difficult to calculate. We are here to help. If you’re an employer with employees who receive tips or overtime income, the Moore Colson Tax Team can also provide guidance on how to answer employee questions for 2025 and how to ensure you’re in compliance with reporting requirements for 2026.