Are you fully capitalizing on new tax opportunities while remaining compliant?
Under the One Big Beautiful Bill Act, many workers can claim a federal income tax deduction for certain overtime pay for tax years after 2024 and before 2029. That means eligible taxpayers may be able to reduce their taxable income by up to $12,500 each year, or $25,000 for married couples filing jointly.
This generally refers to the “half” portion of “time-and-a-half” compensation required under the Fair Labor Standards Act, as reported on a Form W-2, Form 1099, or other applicable statements.
For example, if you normally earn $20 an hour and get $30 an hour for overtime, the deductible part is generally the extra $10 premium, not the full $30.
If an employer voluntarily pays more generous premiums, such as double time, the excess over the FLSA-required premium is not qualified overtime for this deduction.
Deduction phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers)
The deduction is available for both itemizing and non-itemizing taxpayers.
This is not an exclusion from wages, and it is not a payroll tax holiday. (It does not change payroll taxes.) Overtime compensation generally remains subject to Social Security tax and Medicare tax, and employers must still treat overtime as wages for employment tax purposes. The benefit is an income tax deduction claimed on the individual’s return. Employers may adjust withholding if an employee submits an updated Form W-4, but the legal benefit itself is realized through the return.
M Kohn & Co Practical Advice:
The new OBBBA overtime rule could lower federal income taxes for some workers, but it is not a complete tax exemption for overtime pay. In most cases, only the overtime premium portion qualifies, and payroll taxes still apply.
If you earn overtime, it may be worth saving your pay records and checking carefully how much of your overtime actually qualifies for the deduction.
Let’s ensure you’re maximizing every available opportunity. Contact us today to review your situation and ensure your optimal benefits while remaining compliant.
