“Ask Sarah” Column

Dear Sarah,

I read recently that there is a provision in the recent One Big Beautiful Bill Act changing how overtime payments are taxed. What do we need to do to comply with this new law?

Is This Really A Thing?
Signed, Reader

Dear Reader,

Yes! The much discussed “no tax on overtime” rule really is a thing, but it isn’t quite what the headlines might imply. As part of the One Big Beautiful Bill Act (OBBBA), which was enacted in July 2025, Congress added a new federal income-tax deduction for qualified overtime pay effective for tax years 2025 through 2028. It’s designed to reduce federal taxable income for employees who work overtime, but it doesn’t literally make all overtime pay tax-free. Instead, employees may deduct the premium portion of their overtime (for example, the “half” in time-and-a-half pay required under the Fair Labor Standards Act) up to a maximum of $12,500 for single filers or $25,000 for married filing jointly. This deduction phases out for higher earners beginning around $150,000 (single) and $300,000 (joint).

For employers, the provision has reporting and payroll implications rather than changing how overtime is calculated or withheld in the ordinary course. Overtime wages continue to be reported on W-2s and are still subject to Social Security and Medicare taxes during the year; the deduction applies when the employee files their federal tax return.

For Tax Year 2025, with W-2s issued in January 2026, there is no requirement for employers to include separate detail for overtime. However, it is encouraged that employers provide employees with the proper calculation of their overtime premium for 2025 to help them when calculating and taking this new deduction. It’s probably easiest to run a report to give employees a printout of that calculation, but the IRS is also saying employers could enter the qualified overtime compensation amount into Box 14 on the W2 (used for informational purposes).

In late January 2026, the IRS released Fact Sheet 2026-01 to address frequently asked questions about the deduction. You can reference the Fact Sheet here.

For Tax Year 2026, there will be a new code (TT) for qualified overtime in Box 12 of the W2. So, in preparation for this, you should make sure that your system accurately tracks and can report qualified overtime.

“Ask Sarah” is prepared by Sarah Glaser, Chair of the Firm’s Employment Law Practice Group. If you would like additional information or have questions related to this article or other employment matters, please contact Sarah at 512.322.5881 or sglaser@lglawfirm.com.