One Big Beautiful Bill (OB3) Overtime Deduction (new)

This is a brand new deduction, effective for 2025-2028.

If an employee receives time and a half for overtime, the deduction is only for the half time amount paid.  For example, an employees is paid $20/hr.  He receives $30/hr for overtime pay.  Only the extra $10/hr in wages is deductible.

If an employer pays more than time and a half, this is interpreted as being voluntarily paid.  Per Section 7 of the Fair Labor Standards Act (FLSA), only the REQUIRED amount of half time is deductible overtime pay.  If overtime is required by the state but not by federal law, then the overtime pay is not deductible.

This deduction is limited to $12.5K(single) / $25K(MFJ).  This deduction has a phaseout.    Phaseout begins when your MAGI hits $75K / $150K, and fully phases out at $150K / $300K.  The employer and employee still pay FICA, or payroll tax (comprised of Medicare and Social Security), on this deductible overtime.  Stated another way: The overtime pay is deductible for income tax purposes, but not for payroll tax purposes.

Employers must separately account for the amount of qualified overtime compensation paid to the employee on the year-end W-2 form.