Written By Bennett Guidry
The One Big Beautiful Bill Act (OBBBA) was signed into law in the United States on July 4, 2025. Many of the provisions within this bill go into effect during the 2025 tax year. One of these provisions is the deduction on qualified overtime compensation. In this article, I will simplify the deduction and explain how it can help you to reduce the tax liability on your 2025 tax return.
Sec. 70202 of the OBBBA covers the overtime compensation deduction, which will be in effect during the 2025-2028 tax years. The overtime compensation deduction essentially eliminates the income tax on qualified overtime compensation for most individuals, within certain limitations. Therefore, qualifying individuals who receive qualified overtime compensation will only be taxed on their base pay rate rather than the full overtime rate (i.e. 1.5 times the pay rate). This will be most beneficial to employees working in industries in which overtime labor is commonly employed, such as retail, construction, and healthcare.
It is essential to understand the specifics of the overtime compensation deduction, which can be found in Section 225 of the Internal Revenue Code. The overtime deduction is equal to the premium compensation received during the tax year. For example, an employee whose base pay rate is $10 per hour might earn overtime pay at a rate of 1.5 times the regular rate. In this scenario, the full overtime pay rate is $15 per hour. The $5 in excess of the regular pay rate forms the basis for the overtime deduction. If this individual would work 500 overtime hours at this rate, then the deduction would be $2,500.
Individuals seeking to claim the overtime compensation deduction on future tax returns should also understand the limitations within Section 225. First, the deduction is limited to $25,000 for married taxpayers filing a joint return. All other filers, excluding married individuals filing separate tax returns, are limited to a deduction of $12,500. A married individual that files a return separately from their spouse cannot claim the deduction. Secondly, the deduction is reduced by $100 for each $1,000 increment by which the individual’s modified adjusted gross income exceeds the relevant threshold. The threshold for married taxpayers filing a joint tax return is $300,000. For all other tax return filers, the threshold is equal to $150,000.
There are several ways in which tax return filers can get the most benefit out of the overtime compensation deduction. Employees who are paid hourly wages are more likely to be compensated at premium overtime rates than salaried professionals. This is crucial information, because only premium overtime compensation is eligible for the deduction. It is also important for an individual to work a given number of hours with one employer rather than splitting the same number of hours between multiple part-time jobs. An employee who has 2 part-time jobs may not be taking full advantage of the deduction. If the employee works for 30 hours per week at each of these jobs, then they have worked for 60 hours total during the week. However, the employee will not receive premium overtime pay because they worked for less than 40 hours for each employer. Working for 60 hours at one job for one employer would instead allow the employee to be compensated for 20 hours at the premium overtime rate. This will allow the employee to take full advantage of the overtime compensation deduction on their tax return.
The One, Big, Beautiful Bill consists of various sections that will impact future tax filings. Please reach out if you would like to discuss the impact of these provisions with your certified tax professional today.
Citation:
Link to One Big Beautiful Bill: https://www.congress.gov/bill/119th-congress/house-bill/1/text