Just like “No Tax on Tips”, the “No Tax on Overtime” portion of the One, Big, Beautiful Bill Act (OBBB) has a lot of misconceptions around it.
Do your employees have questions? I bet so, and I’ll tell you how to answer them.
At CSI Accounting & Payroll, we’ve provided small business financial and advisory services for 60 years. We stay on top of law changes that may affect our clients, including “No Tax on Overtime”. Let’s discuss:
- Will my employees see larger checks throughout the year if they work overtime?
- Does this mean overtime won’t be taxed at all?
- Does this apply to all overtime pay?
- How much money will this save workers?
- Will “No Tax on Overtime” last forever?
Will My Employees See Larger Checks Throughout the Year if They Work Overtime?
No, overtime pay stays the same throughout the year, and taxes are the same on checks, too. “No Tax on Overtime” is actually a deduction on your employees’ returns during tax season.
So, why’s there a line on your employees’ pay stubs that says something like “FLSA OT premium”? It’s just a placeholder so that when they get their W-2s, they can see what their premium for the year was. This number is used to determine their tax deduction.
As an employer, it’s your responsibility to ensure that the qualified overtime compensation is tracked and makes it into your payroll system. If you work with CSI Accounting & Payroll, we do this for you! No more worrying about penalties for non-compliance.
Does This Mean Overtime Won’t Be Taxed at All?
The deduction only applies to federal income taxes, and it’s only eligible for up to $12,500 (single filers) and $25,000 (married filing jointly) in overtime premium compensation. The deduction begins to phase out for workers with a modified adjusted gross income (MAGI) over $150,000 (single filers) or $300,000 (joint filers).
FICA taxes (Social Security and Medicare) are still paid fully by both employees and employers.
Does This Apply to All Overtime Pay?
No, not all of the pay. Only the premium portion (the extra "half" in time-and-a-half pay) of overtime compensation qualifies. Plus, remember the cap of $12,500 for single filers and $25,000 for married filing jointly.
How Much Money Will This Save Workers?
The deduction is capped annually at $12,500 for single filers and $25,000 for married individuals filing jointly. It’s not realized throughout the year, but it’s a deduction claimed at tax time.
Will “No Tax on Overtime” Last Forever?
Nope! Like many tax laws, it’s only here to stay for a few years. This deduction will only apply to 2025-2028 tax years unless extended by Congress.
So if your employees have worked any overtime hours, tell them to find the premium on their W-2s and claim the deduction this tax season!
Navigate Law Changes With Your Payroll Specialist!
Now that you know about how quickly misconceptions can spread, are you ready to check out payroll services with CSI Accounting & Payroll to stay on top of law changes that affect your business?
To see if we can be a good fit, click the button below for a free consultation:
Not ready to talk? That’s okay! First, estimate what your monthly fee may look like by clicking the image below:
