No Tax on Overtime (One Big Beautiful Bill Act)

The "One Big Beautiful Bill Act" (OBBBA) was signed into law July 4, 2025, is effective starting in 2025, and introduces a federal income tax deduction for the "premium portion" of overtime that is required per the Fair Labor Standards Act (FLSA). Eligible overtime compensation is limited to $12,500 (or $25,000, for married filing jointly).

The following points are meant to explain this provision and must not be considered tax advice.  Consult with a tax expert with questions related to claiming the deduction.

Information

What is “No Tax on Overtime”

• OBBBA was signed into law on July 4, 2025, and took effect in 2025.  

• The “No Tax on Overtime” provision of OBBBA provides a federal income tax deduction for qualified overtime compensation that is required by the Fair Labor Standards Act (FLSA).

• The maximum annual deduction is $12,500 for individual filers and $25,000 for married couples filing jointly.

• Qualified overtime compensation will be reported in Box 14 on 2025 Form W-2 (by the end of January) and Box 12 on Form W-2 for tax years 2026-2028.

• This deduction does not reduce tax withholding from paychecks; instead, it will be claimed when employees file their federal income tax returns.

• This is not reflected in paychecks. Employees will continue to receive overtime pay as usual.

Who Qualifies

• Hourly (non-exempt) employees are entitled to certain wage and hour protections under the FLSA.

• Exempt employees (salaried) and independent contractors are not eligible for this deduction.

What is Qualified Overtime

• Qualified overtime will be reported on Form W-2 and differs from the overtime earnings shown on the paycheck.  

• Overtime in paychecks is paid at 1.5 times the regular hourly rate, while qualified overtime compensation is only the “half” portion of the regular hourly rate.

• Qualified overtime includes hours actually worked over 40 (over 80 for Law Enforcement Officers) and does not include paid time off that is included in overtime calculations per collective bargaining agreements. That means holiday, administrative leave, sick leave, vacation, bereavement pay, and other similar benefits will not be included in qualified overtime calculations reported on Form W-2.

Steps for Employees

• Report all time on the timesheet in a timely manner and review your overtime earnings regularly in Employee Self Service to ensure accuracy:

  • Time > Timesheet (Payable Time) & Payable Time Detail: Overtime-FLSA Qualified will be calculated for regular employees and can be reviewed in Payable Time Detail

  • Pay > View Pay Statement: Overtime-FLSA Qualified earnings will show for eligible employees

• No action is needed to adjust your tax withholding; you claim the deduction with your annual tax filing.

• If you have any questions, reach out to HR about your FLSA status and Payroll about how your overtime is calculated or reported.

Additional Resources & FAQ

• More information is available in the University’s standard operating procedure: 1040.26 No Tax on Overtime - OBBBA

• Attend one of the informational sessions scheduled in the next few weeks: Register for No Tax on Overtime

  • All sessions are open to anyone interested even though each session will be geared towards a specific group of employees.  Sessions will be recorded and linked here for future reference.

  • Date and Time	Focus
    Thursday, Nov. 20, 2025, 1:00 pm	Temporary and Student Workers
    Thursday, Dec. 04, 2025, 1:00 pm	Non-Represented Regular, ACSUM/COLT
    Thursday, Dec. 11, 2025, 1:00 pm	Service & Maintenance
    Thursday, Dec. 18, 2025, 1:00 pm	Police