Employers Prepare for New Overtime Deduction Reporting Rules Under OBBB
The One Big Beautiful Bill (OBBB) Act, passed earlier this year, introduces a temporary tax break for individuals who receive overtime pay. For tax years 2025 through 2028, eligible workers may deduct a portion of overtime wages from taxable income. The change allows employees who work overtime to reduce taxable income, offering some financial relief for extra hours worked. Employers, meanwhile, will play a supporting role by reporting qualified overtime wages so the deduction may be claimed accurately.
The deduction applies only to overtime wages required under the Fair Labor Standards Act (FLSA). This means the eligible amount is the ‘half’ portion of time-and-a-half pay for hours worked in excess of 40 per week. Overtime compensation required under state law or collective bargaining agreements, such as daily overtime after eight hours, does not qualify.
For tax years 2025 through 2028, individuals may deduct up to $12,500 of qualified overtime pay. Married couples filing jointly may deduct up to $25,000. The deduction phases out for taxpayers with modified adjusted gross income above $150,000 or $300,000 for joint filers. Eligibility applies to both itemizing and non-itemizing taxpayers. To claim the deduction, individuals must include their Social Security Number on the return and file jointly if married.
Employers and other payors will be required to file information returns and provide statements to employees showing the total qualified overtime compensation for the year. The IRS has released a draft of the 2026 Form W-2 that introduces a new Box 12 code “TT” for this purpose. For 2025, employers may use a reasonable method to estimate and report these amounts, and transition relief will be available as reporting rules take effect. Final guidance is expected later this year.
While there is no change to wage withholding or payroll taxes, AAFCPAs advises that clients review payroll systems to ensure qualified overtime is tracked separately from other compensation. Proper reporting will be necessary to allow employees to benefit from the deduction and to maintain compliance with IRS requirements.
How We Help
AAFCPAs helps businesses, including closely held and family-owned enterprises and entrepreneurs, navigate new tax rules and reporting requirements with practical, business-focused guidance. While employers remain responsible for tracking qualified overtime pay under the OBBB Act, our team provides support by clarifying compliance obligations, reviewing reporting processes, and assessing potential tax implications. We help owners understand how these changes intersect with overall tax planning, ensuring that both business operations and personal financial considerations are aligned. By combining technical knowledge with a focus on practical solutions, AAFCPAs helps businesses manage complexity efficiently while staying prepared for evolving tax regulations.
These insights were contributed by Brian O’Hearn, CPA, MSA, Tax Manager.
Questions? Reach out to our author directly or your AAFCPAs partner.
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