This Firm Insights post summarizes one provision of the “One Big Beautiful Bill” related to the tax treatment of overtime compensation and related employer wage reporting obligations.
Overtime Pay and Employee Tax Treatment
The Fair Labor Standards Act (FLSA) generally requires that overtime be paid to certain employees at a rate of one-and-a-half times their regular rate of pay after 40 hours in a workweek. There are exceptions.
For the years 2025 through 2028, employees who receive overtime pay may be able to deduct one-half of that overtime compensation from their income and thus not pay income taxes on that portion. The maximum deductible amount in any year is $12,500 ($25,000 for joint filers). The deduction begins to phase out at $150,000 of income ($300,000 for joint filers). The deduction may be taken whether or not the taxpayer itemizes deductions.
What Qualifies as Deductible Overtime Compensation
The deduction applies only to “qualified overtime compensation.” This refers to overtime compensation that an employer is required to pay under the FLSA.
If an employer is not required to pay overtime under the FLSA but does so pursuant to its own policies, that pay is not qualified overtime compensation. Likewise, if an employer pays overtime at a rate higher than time-and-a-half, only the portion equal to the FLSA-required premium is eligible for the deduction.
For example, if an employee earning $10 per hour is paid $15 per hour for overtime, the $5 premium is deductible. If the employee is instead paid double-time at $20 per hour, only $5 of that $10 premium is deductible. The deductible amount is based solely on the FLSA-mandated time-and-a-half rate.
Overtime that arises solely from employer policies (such as holidays, weekends, or scheduled days off), state or local law, collective bargaining agreements, or other contractual arrangements does not qualify for the deduction.
Employer Reporting Obligations
The enactment of the new law did not allow sufficient time for all employers to retool their wage reporting systems to separately report qualified overtime compensation on 2025 Forms W-2. As a result, the IRS has granted transitional relief for 2025, meaning employers will not face penalties for failing to separately report overtime for that year.
For 2026 through 2028, the law contemplates separate reporting of qualified overtime compensation on employee W-2 forms.
What Comes Next
The overtime-related provisions discussed above represent only one component of the broader tax changes included in the “One Big Beautiful Bill.” Employers and employees should continue to monitor how these provisions are implemented and consider how overtime pay, payroll reporting, and compensation strategies may be affected.
For additional guidance on these issues and related tax planning considerations, contact Scott Novak to discuss your specific circumstances.
Utility-Scale Battery Storage Projects: A Legal Roadmap for Developers, Property Owners and Other Stakeholders
Utility-scale battery energy storage systems (BESS) are becoming an increasingly important component of the electric grid throughout New Jersey, New York, and Pennsylvania. As renewable generation expands, electricity demand increases and grid operators seek greater flexibility, battery storage can help balance supply and demand while providing additional capacity and reliability. For developers, battery storage presents […]
Navigating Disputes: Hire a Partnership Dispute Lawyer
A falling out between partners can be disastrous for any business. In many cases, the partnership will not survive. If you are in an unworkable situation with your partners, it may be time to consult a partnership dispute lawyer experienced in handling partnership breakups and dissolutions before the situation deteriorates any further. It is easy […]
Section 363 Sales in Bankruptcy: What Businesses, Lenders, and Buyers Need to Know
When a company enters Chapter 11 bankruptcy, many assume the process will culminate in a lengthy reorganization plan. However, distressed businesses are increasingly being sold through a different mechanism — a sale under Section 363 of the United States Bankruptcy Code. A Section 363 sale allows a company, as a debtor-in-possession in bankruptcy, to sell […]
Zoning Laws Explained: What You Need to Know Before Buying Property
Before buying property, it is critical to determine whether local zoning laws may affect your plans. If you plan to redevelop the property, you will want to confirm that local zoning regulations permit development as intended. If acquiring property that is already developed, you must verify that the use is permitted in the underlying zoning […]
Special Needs Trusts in New Jersey: Planning for Your Loved One’s Future
For parents of a child with a disability, estate planning raises concerns that go well beyond deciding who will inherit their assets. Parents may spend years making sure their child has the right care, services, and support. Eventually, they must also confront a difficult question: Who will take over when they can no longer do […]
What Every Real Estate Investor Should Know Before Buying a Rental Property
Before buying a New Jersey rental property, an investor should verify realistic operating numbers, the property’s legal and regulatory status, lead-based paint and flood compliance, the existing leases and tenant protections, and the right ownership structure. A rental property is more than a piece of real estate; it is an operating business subject to legal, […]
No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.
Sign up to get the latest from our attorneys!
Explore What Matters Most to You.
Consider subscribing to our Firm Insights mailing list by clicking the button below so you can keep up to date with the firm`s latest articles covering various legal topics.
Stay informed and inspired with the latest updates, insights, and events from Scarinci Hollenbeck. Our resource library provides valuable content across a range of categories to keep you connected and ahead of the curve.
Let`s get in touch!
Sign up to get the latest from the Scarinci Hollenbeck, LLC attorneys!
