The recently enacted One Big Beautiful Bill Act introduces a major change to the federal tax code, delivering welcome news for both employees and employers for tax years 2025 through 2028, as qualified overtime pay will not be subject to Federal income tax.
This move is poised to increase take-home pay for many American workers and streamline compensation strategies for businesses.
What Is Qualified Overtime Pay?
Within the framework of the Act, “qualified overtime pay” specifically refers to the “half” portion of the “time-and-a-half” rate that employees earn for hours worked beyond their standard schedule. For example, if your regular hourly wage is $20, and overtime is paid at $30 per hour, the additional $10 (the “half” over your base rate) is the qualified amount eligible for the exemption. Employers are now required to track this “half” portion separately and clearly report it on employees’ year-end tax forms.
Deduction Limits and Eligibility
Taxpayers can deduct up to $12,500 (single filers) or $25,000 (joint filers) of qualified overtime pay from their Federal taxable income. These deductions begin to phase out for single taxpayers with a modified adjusted gross income above $150,000 and for married couples filing jointly with a modified adjusted gross income above $300,000. Notably, you do not need to itemize deductions to claim this benefit, making it broadly accessible. To qualify, you must include your Social Security number on your tax return. However, keep in mind this deduction applies only to Federal income tax; the overtime pay remains subject to Social Security and Medicare taxes.
How Does This Benefit Taxpayers?
For employees, the Act means more money in their pockets, particularly for those who regularly work overtime. The incentive to take on extra hours is now stronger, as the additional “half” pay will not be reduced by Federal income taxes during the eligible years. This can make a meaningful difference in annual earnings and financial planning.
Impact on Businesses
For employers, while the Act adds a new requirement to separately track and report qualified overtime pay, it also presents an opportunity to enhance employee compensation packages. Businesses may find it easier to fill overtime shifts and reward hard-working staff, improving morale and productivity during peak periods.
If you have questions about how the One Big Beautiful Bill Act might affect your personal tax situation or your company’s payroll processes, reach out to your Zinner and Co. tax team representative for expert guidance.
