As part of our ongoing series on tax law changes introduced by the One Big Beautiful Bill (July 2025), this newsletter explains the new overtime wage deduction available starting with the 2025 tax year.
Key Points for claiming the deduction
- Who Qualifies?
- Individuals who receive qualified overtime pay may be able to claim a deduction up to $12,500 or ($25,000 if you are married).
- The deduction is unavailable if your income exceeds $275,000 ($550,000 if you are married)
- This deduction is available for tax years 2025 through 2028.
- What is Qualified Overtime for this deduction?
- The amount that can qualify for this deduction is the “premium” amount paid for your overtime wages.
- For example, if your normal hourly pay rate is $10/hour but you get paid $15/hour for overtime wages. Only the $5 “premium” paid above your regular hourly rate qualifies for the deduction.
- If you are in a typical overtime arrangement (paid 1.5 times your hourly rate) you can calculate the qualified portion by taking your total gross overtime pay and dividing by 3.
- How will you get this information to prepare your return?
- For 2025, the IRS will not update Form W2 to include this information. You will need to rely on year-end pay stubs or gather the information from your employer.
- Starting in 2026, reporting will change to include a dedicated box for qualified overtime.
Key Points for Employers:
- As mentioned in the previous section, for 2025 the federal tax forms will not be changing. Therefore, this information is not automatically going to be given to your employees.
- While under no formal obligation for reporting in 2025, we recommend employers provide employees with a year-end statement showing qualified overtime. This can be included on final pay stubs or as a payroll summary report. (Check with your payroll provider for options.)
- This deduction can significantly reduce taxable income for employees who work overtime. Employers who assist with clear reporting will help employees claim the benefit accurately.
Have questions about eligibility or reporting? Call us at (307-577-4040) — we’re here to help you navigate this new deduction.
