On July 3, 2025, the U.S. House of Representatives narrowly passed H.R.1, the so-called “One Big Beautiful Bill Act,” ending a dramatic journey through Congress that dominated headlines in recent weeks. The Act includes several provisions related to campaign promises made by President Donald J. Trump.
Section 70202 of the Act creates an above-the-line tax deduction for “qualified overtime compensation.” Qualified overtime compensation is defined as “overtime compensation paid to an individual required under section 7 of the Fair Labor Standards Act of 1938 [FLSA] that is in excess of the regular rate … at which such individual is employed.” The following conditions apply:
- The deduction is capped at $12,500 ($25,000 in the case of a joint return) in any taxable year. This amount is reduced by $100 for each $1,000 by which the taxpayer’s modified adjusted gross income exceeds $150,000 ($300,000 in the case of a joint return).
- The deduction applies only to overtime compensation that is “required” under the FLSA and only to the amount that is in “excess” of the employee’s “regular rate.”2 The deduction does not apply to overtime premiums that are not “required” by the FLSA but instead are paid pursuant to contract (including a collective bargaining agreement) or because they are required under state law only (e.g., California law requiring daily overtime for hours worked in excess of eight in one day).
- In an apparent attempt to prevent “double dipping” on these deductions, the Act clarifies that qualified tips cannot also be claimed as qualified overtime compensation.
- As with the deduction for qualified tip income, the deduction is not allowed unless the taxpayer includes their social security number (and, if married and filing jointly, their spouse’s social security number) on their tax return.
Critically, employers must include the total amount of qualified overtime compensation as a separate line item on the Form W-2. This will require employers to keep a distinct record of the overtime premium compensation that is both (a) required under the FLSA and (b) in excess of the regular rate.3 For 2025, the Act authorizes the reporting party to “approximate” the amount designated as qualified overtime compensation pursuant to a “reasonable method” to be specified by the Treasury secretary.
The Act authorizes the secretary to promulgate regulations and issue guidance to “prevent abuse” of this deduction. The “no tax on overtime” deduction takes effect for the 2025 tax year and is set to expire after the 2028 tax year.
- Employers may consider whether to restructure employee classifications or hours reporting to push more earnings into overtime compensation. Employers should exercise extreme caution and consult legal counsel before implementing any compensation changes designed to take advantage of this deduction. Many of the schemes that have been discussed are fraught with risk. As just two examples:
- Employers may be considering converting certain salaried exempt employees to hourly nonexempt status and paying them at an artificially low hourly rate, with the rest of their weekly earnings being designated as “overtime” compensation. For an employee classified as nonexempt under the FLSA, however, the employer must keep an accurate record of all hours worked by the employee and must calculate overtime based on actual hours worked. The employer cannot record a fictitious number of overtime hours designed to generate total weekly wages equal to the employee’s former weekly salary, regardless of actual hours worked.
For their existing non-exempt employees, employers may consider reducing their hourly rates and pushing more of their earnings into “overtime” compensation (e.g., by triggering overtime at 30 hours, or by paying double-time for hours over 40). One challenge of this approach is that the deduction only applies to overtime premiums that are “required” by the FLSA, not to all compensation designated as “overtime” by a creative employer.
Employers navigating the new Form W-2 reporting requirements or who may be considering restructuring employee compensation in consideration of the “no tax on overtime” provision of the Act are encouraged to consult with experienced employment counsel to make certain that they consider all relevant factors in their decision making.
This content was provided by SCGMA legal counsel and is for general informational purposes only. Readers should consult with their own legal counsel for company specific legal advice.