Transcript:
You out there grinding? Are you a hard worker? Well, guess what? There’s a new tax deduction for you. It is the deduction for overtime pay that came with the One Big Beautiful Bill this year.
Hi, everyone. I’m Dave Lewis. I’m a certified public accountant and owner of High Impact CPA, and we are continuing our One Big Beautiful Bill series today talking about the new deduction for overtime pay. So we’ll talk about what it is, what it isn’t, how you as a taxpayer can take advantage of it, and also what it means for you business owners. So let’s jump right in—deduction for overtime pay.
So July 4th of this year the One Big Beautiful Bill got signed into law, and with it comes a whole bunch of provisions.
Now the overtime pay deduction is very similar to the no tax on tips deduction. So we’ve got a video on that, check that out. That’s the last one that we did if you’d like to learn a little bit more about that.
In the meantime, the deduction for overtime pay applies for 2025 through 2028. This is a temporary deduction.
If you are an FLSA qualified employee—basically a non-exempt worker—and working at one and a half times pay (your overtime pay), you get a tax deduction of up to $12,500 per year. And if you’re married filing jointly, that amount doubles to $25,000.
To qualify for this, you have to be an employee listed under FLSA rules as a non-exempt worker. We’ll go into that toward the end of the video because there are some tricky things that people are going to try to do that won’t work under this bill.
So, $12,500 a year if single or head of household, $25,000 if married filing jointly. Married filing separately has its own rules as usual—we won’t go over that here. I’ll probably make a whole other video on married filing separately rules for a bunch of these different deductions.
This deduction does have an income phase out, much like the tips deduction. If you are single or head of household and you’re making more than $150,000 a year, this deduction is going to start to go away for you.
For every $1,000 you have in Modified Adjusted Gross Income, you lose $100 of this deduction. So if you’re making a lot of money, this deduction may go away.
Once you hit $275,000 of income, it’s completely gone. And if you’re married filing jointly, that amount is $425,000. Everything in between that $150,000 to $275,000 (or $300,000 to $425,000 if married filing jointly) is a phased-down deduction.
So just be aware of that. If you’re an hourly worker with a high rate of pay and you or your spouse also have other income sources, you may phase out of this deduction.
As far as employers go, nothing really changes this year. It’s like any other wage you’re going to pay—it still has to be reported on the W-2 for your employees.
For 2025, we were hoping for a new W-2 form that would help define all the different wage categories (regular pay, cash tips, overtime, etc.). But we’re not getting a new W-2 form for 2025.
So for now, everything is lumped in box one of the W-2, which means we’ll have to go back to payroll records. Taxpayers will need to keep their final pay stubs and make sure to delineate between regular pay and overtime pay in order to take advantage of this deduction.
There is a new W-2 form slated to come out in 2026 that will break all of that information out. But for 2025, since the bill was passed mid-year, we just have to deal with it and move forward.
Pretty simple deduction—not a lot of meat to it—but there are going to be some things people try to do to skirt it.
The biggest one I’ve heard is: “I’m an S Corp owner. I have to pay myself a reasonable salary. I’ll just put myself on an hourly wage, and then after 40 hours a week, I’ll pay myself overtime.”
Well, no. Like the no tax on tips deduction, you’re not going to be able to get away with that. FLSA specifically excludes S corporation shareholders.
There are limited instances, like if you have a spouse working in the business or if you hire your kids. But it’s always substance-over-form with the IRS.
If you do get audited, they’ll look at what the spouse or kids are actually doing. Does it make sense for the business? Is there really a lack of control over compensation? If not, it won’t fly.
So just be careful—lawmakers and the IRS do think about these things when drafting bills.
One thing I should have said at the top: overtime pay is still subject to Social Security and Medicare taxes. This deduction is only on the income tax side for taxpayers, not something employers need to worry about.
Anyway, this one’s been a bit of a rambler. Again, not a huge amount of detail to it—it’s not super complicated—but just be aware it’s out there.
If you’re an hourly worker making overtime, be aware this deduction is available to you and understand the phaseouts and whether or not they apply.
If you need some help with your taxes, if you need a good tax professional, please reach out to us at High Impact CPA. I’ll leave our contact information in the description below.
As always, if you like the content, like and subscribe.
I’m not a great videographer—we’re getting better at it though. In a couple of months, we’ll have a brand new studio, and the video quality is going to be a lot better.
So stick around. I’m not a YouTuber, but we’re going to make it work. Thanks everyone. Take care.
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