The One Big Beautiful Bill Act (OBBB) introduces many provisions that primarily affect individual taxpayers, including a deduction for overtime pay that may benefit those who work extended hours. Here’s what you need to know.

Deduction details

Under OBBB, a new deduction can be taken on the individual level for qualified overtime compensation. The deduction is limited to $12,500 ($25,000 if married filing jointly) and phases out as adjusted gross income increases above $150,000 ($300,000 if married filing jointly). The deduction also can only be taken by those with a social security number.

Not all overtime qualifies for this deduction. Only qualified overtime compensation can be taken for the deduction. This is defined as “overtime compensation paid to an individual under section 7 of the Fair Labor Standards Act of 1938 that is in excess of the regular rate…at which such individual is employed.” The Fair Labor Standards Act defines overtime as hours worked in a week over 40 hours and provides for time and a half pay for those hours. Qualified overtime compensation is the “half” portion of “time and a half” pay. 

Why does this matter? Some individuals may be paid overtime for working on a holiday or due to contractual agreements. However, that overtime pay may not qualify for the deduction. Taxpayers will need to be conscious of this when projecting future tax liabilities.

This may be clearer with some examples. Suppose you are paid $50 an hour as your base pay. Your overtime rate is $50 * 1.5 = $75 an hour for working more than 40 hours a week, or $25 above your base rate. Your qualified overtime compensation for overtime is the $25 above your base pay, not the full $75 you are paid.

Now suppose the same $50 base pay rate. You don’t work more than 40 hours in a week but one of those days is a holiday and your contract entitles you to overtime when you work on holidays. Unfortunately, this overtime would not qualify for the deduction since it is not paid for working over 40 hours in the week.

Deduction reporting

The deduction for overtime will be reported on the individual tax level and can be taken even by those claiming the standard deduction. The deduction can only be taken to the extent the qualified overtime is reported to the taxpayer on a tax form such as a W-2. For tax year 2026, the IRS is updating the Form W-2 to add a line in box 12 for qualified overtime compensation for ease of reporting. For 2025, the Treasury department will release guidance on allowable methods for employers to calculate qualified overtime pay. This transitional guidance is necessary as employers may not have been tracking this information prior to passage of OBBB. Treasury will also release instructions on how businesses may report qualified overtime compensation to employees as there is no intention of updating the W-2 for tax year 2025.

What does CohnReznick think?

The deduction for qualified overtime pay may be a new boon to those working extended hours. Taxpayers should work with their advisors to identify if they may have a benefit from this new deduction and to plan accordingly, including by assessing if any changes to withholding are warranted. While businesses are not able to benefit directly from this deduction, they too must plan for it by consulting with their payroll providers to assess how much qualified overtime compensation has been paid to each employee for the year to date and ensure proper tracking and reporting going forward.