Employee Overtime Requirements: 3 Things to Know About a Recent Law Change
On July 4, 2025, President Trump signed the “One Big Beautiful Bill Act” into law. The legislation made headlines because of significant cuts to Medicaid and increased spending on immigration enforcement. While less publicized, the bill’s changes to the workplace were also consequential, particularly in relation to overtime. I recommend that employers and employees keep the following in mind when requesting or granting overtime:
The legislation allows employees to claim up to a $12,500 in maximum annual tax deduction ($25,000 for joint filers) for the tax years 2025 through 2028. The bill specifically references employees who receive qualified overtime, defined as: “overtime compensation paid to an individual under section 7 of the Fair Labor Standards Act…that is in excess of the regular rate (as used in such section) at which the individual is employed.” Therefore, non-exempt employees who work more than forty (40) hours in a seven-day period may be eligible to deduct their taxable income by the amount of overtime worked (i.e., the “difference” between the straight pay and time and a half). The overtime deduction is available in addition to standard tax deductions; however, it may not ultimately apply if an employee has a threshold income amount of $150,000 (or $300,000 for joint filers).
Employers have increased reporting requirements under the Act. Employers must now specifically itemize the total amount of annual qualified overtime paid on the employee’s W-2 form. I recommend that employers and business partners maintain clear and accurate records of employees’ overtime, allowing for easy retrieval for tax reporting purposes.
Eligibility is not guaranteed, and certain carveouts apply. To be eligible, the bill states that employees must file their taxes using their Social Security number (typical for most filers), with the requirement that married individuals file jointly. The deduction does not apply to overtime mandated by contract (as opposed to the FLSA), such as collective bargaining agreements, or if already imposed by state/local law (i.e., California).
The IRS notes that additional guidance for employers will be available in the coming months/weeks, with “transition relief” for employers in tax year 2025. I recommend that employers and employees closely monitor these forthcoming developments to ensure compliance.
Have questions about how this legislation affects you? Reach out to me at tstringham@kramerelias.com or (703) 202-7633 to discuss.
Theodora Stringham focuses her practice on bringing solutions-oriented representation and zealous advocacy to complex issues impacting individuals, organizations, and businesses. Ms. Stringham seeks to understand clients’ concerns and provide thorough and strategic options aimed at achieving their goals. She has been recognized for her work in the Real Estate, Labor and Employment, and Commercial Litigation practice areas, providing counseling and litigation support for a wide variety of concerns.