Podcast: “Big, Beautiful” Changes, Pt. 2: No Tax on Overtime

True to President Trump’s campaign promise, the “one big, beautiful bill” allows a limited deduction for overtime income, but the mantra “no tax on overtime” is not quite accurate. In this episode, Tax attorney Douglas Charnas (Washington) and Employment attorney Susan Desmond (New Orleans) discuss the new employee deduction for overtime pay and employers’ reporting responsibilities for these deductions.

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Douglas Charnas: Welcome to our podcast on the new deduction for overtime pay. I’m Douglas Charnas, a member of McGlinchey’s Washington, DC office. I practice corporate and tax law. I’m joined today by my colleague, Susan Fahey Desmond. Susan is a member in McGlinchey’s New Orleans office. She is a labor and employment lawyer with more than 35 years of helping companies in numerous industries minimize the cost and disruption of employment disputes.

Susan, President Trump included in his campaign promises no tax on overtime pay. Did he keep this promise?

Susan Desmond: Well, the answer to that question is yes, but it is a very, very qualified yes. There are a number of requirements and limitations on the deduction. Also, the deduction is effective only for the tax years 2025 through 2028.

Douglas Charnas: Okay, so now in our podcast on the deduction for tips, I explained the difference between a deduction and an exclusion. It is an important distinction, so I want to repeat it. The new law does not exclude overtime pay from gross income. Rather, it allows a limited tax deduction for overtime pay. This is important, particularly for employment taxes.

The new law does not exclude overtime pay from gross income. Rather, it allows a limited tax deduction for overtime pay. This is important, particularly for employment taxes.

Susan Desmond: You are exactly right. When the idea of no tax on overtime pay was initially floated, there were many questions about whether overtime pay would be subject to employment taxes, like FICA (Federal Insurance Contributions Act) and FUTA (Federal Unemployment Tax Act) taxes. So one of the questions that we had was whether the employees would get credit for social security purposes for overtime pay by providing an income tax deduction rather than an exclusion. Overtime pay is still considered included in the employee’s income for employment tax purposes.

Douglas Charnas: So what this means is that employees are still paying an employment tax of 7.65% on overtime pay, and self-employed individuals are paying 15.3%.

Susan Desmond: Yes, employees will pay 6.2% for old age, survivor, and disability insurance up to the annual wage base, which for 2025 is $176,100, and 1.45 % for Medicare insurance, which has no wage base limit. The employer on the other hand, will pay its portion of the employment tax, which also is 7.65%. Self-employed individuals will pay the full 15.3%. Employers are also required to pay the FUTA tax. This is why I said earlier that the answer to whether there is no tax on overtime pay is a very qualified yes. Overtime pay is still subject to employment taxes.

This is why I said earlier that the answer to whether there is no tax on overtime pay is a very qualified yes. Overtime pay is still subject to employment taxes.

Douglas Charnas: Alright, so now that we’ve gone through the deduction versus exclusion issue, can you walk us through the key points of “no tax on overtime pay”?

Susan Desmond: Sure.

Douglas Charnas: Well, let me stop you right there because there’s one thing I wanted to point out. I’m not a labor and employment lawyer, so I’m not all that clear on what constitutes overtime pay. It seems to me that the term “overtime pay” can mean different things.

I’m reminded of a story my father told me when he and my mother were building their house. My father would visit the house every day during construction. He stopped by the house one Sunday afternoon, and there was a man at the house watching a football game on his portable TV. My father asked the man what he was doing at the house. The man told my father he was an electrician and he was there to work. My father nicely noted that the man was not working. The man told my father that there was no work for him to do. Puzzled, my father asked the man why he was there. The man told my father it was his weekend to work on Sunday and get overtime at double his normal rate. That was the union rule. In those days, you did not mess with the unions in Cleveland, Ohio. So my father wished the man a good afternoon and left. Long story, but the point is whether that individual’s overtime pay at double his normal hourly rate would qualify for the overtime pay deduction.

Susan Desmond: Yes, it does sound like it might be a good idea or a good time to be a union member. The answer to your question lies in the definition of “qualified overtime compensation.” The deduction is available only for qualified overtime compensation. So this would be overtime compensation paid to an individual required under section 7 of the Fair Labor Standards Act, sometimes referred to as the FLSA, that is in excess of the regular rate at which the individual is employed. This would include the “premium” portion of overtime, such as the additional half-time amount paid under the FLSA as part of that “time and a half” compensation.

So to qualify, the overtime compensation must be reported on a Form W-2 or other specified statement furnished to the individual.

The deduction is available only for qualified overtime compensation. This would include the “premium” portion of overtime, such as the additional half-time amount paid under the FLSA as part of that “time-and-a-half” compensation. So to qualify, the overtime compensation must be reported on a Form W-2 or other specified statement furnished to the individual.

Douglas Charnas: Okay, so Susan, I’m assuming the amount of the deduction that can be claimed for overtime pay is limited, sort of similarly to the way it’s limited for pay on tips?

Susan Desmond: That is correct. The annual cap is $12,500 for a single filer and $25,000 for joint filers. This does differ from the annual cap for tips, which is $25,000. A single or married individual is limited to a $12,500 deduction for overtime. Thus, a single filer can deduct $12,500 for overtime pay. This does differ from the deduction for tips, which is limited to $25,000.

So, like the deduction for tip income, the deduction for overtime pay will phase out for taxpayers with modified adjusted gross income of $150,000, or for joint filers, $300,000. Joint filers and spouses must file a joint return to claim the deduction.

Also like the deduction for tip income, the deduction is available regardless of whether the taxpayer does itemize deductions, but the employee must include his or her Social Security Number (SSN) on the federal income tax return that he or she will file to claim the deduction.

Douglas Charnas: As I understand it, then, the individual must include his or her Social Security Number on the tax return to claim the deduction for overtime pay. So that means that it can’t be a Taxpayer Identification Number?

Susan Desmond: Yes, the same requirement is included in the deduction for tips. The proposed regulations for the tip deduction make clear that it must be a Social Security Number. Many workers who are not citizens or resident aliens, but may be permitted to work in the United States — they are required to pay a tax, but may have an individual Taxpayer Identification Number, rather than a Social Security Number. The proposed regulations make clear that the deduction will not be available if the individual only has an individual Taxpayer Identification Number.

Many workers who are not citizens or resident aliens, but may be permitted to work in the United States — they are required to pay a tax, but may have an individual Taxpayer Identification Number, rather than a Social Security Number. The proposed regulations make clear that the deduction will not be available if the individual only has an individual Taxpayer Identification Number.

Douglas Charnas: Alright, so even though the overtime pay deduction is claimed by the employee, I’m assuming the employer has reporting requirements as well.

Susan Desmond: Well, that would be the case. Of course. Employers must identify and track the portion of overtime pay that does qualify for the deduction – this is the premium amount paid above the employee’s regular rate under the Fair Labor Standards Act. Accurate payroll records will be considered essential, as inaccurate reporting may limit an employee’s ability to claim the deduction or lead to compliance issues.

Employers will be required to report the total amount of qualified overtime compensation paid to each employee on annual wage statements such as that W-2. These forms must reflect the correct amounts and be submitted to the Internal Revenue Service or the Social Security Administration and the employee. The IRS has issued a draft Form W-2 with instructions on how to report the overtime pay.

Douglas Charnas: Well, this is a lot to take in. Susan, do you have some recommended steps employers should take?

Susan Desmond: Yes, we do have a few. Of course, this would be a great time to review your overtime pay practices. You want to ensure that all your overtime compensation complies with the Fair Labor for Standards Act and is clearly documented. Only the premium portion of the time-and-a-half wages will be deductible by the employee.

Employers may also want to configure payroll to track overtime premium separately. You may want to adjust your payroll systems to distinguish between regular wages and the overtime premium amount. This will support proper reporting and help employees claim their deduction.

Of course, we always want to be prepared, so we want to prepare for the new reporting requirements. Employers must furnish those annual statements, such as the Form W-2, that clearly reflect the total amount of qualified overtime compensation paid to each worker.

Employers must furnish those annual statements, such as the Form W-2, that clearly reflect the total amount of qualified overtime compensation paid to each worker.

This would also be a great time to verify that Social Security Number because employees must include their Social Security number to claim the deduction. Employers should always ensure accurate Social Security numbers are being maintained and verified for all their employees.

Many employers may also want to coordinate with their tax and legal advisors. Engage internal and external tax counsel to ensure that pay structures and record keeping do comply with evolving IRS guidance and that reporting formats meet the new requirements.

Communication is always key. Here’s a good time to communicate with your employees. Provide your employees with clear documentation and guidance to support their ability to claim the deduction, including properly labeled wage statements.

And finally, employers want to monitor these IRS updates. Stay informed about the transition relief for tax year 2025 and any subsequent changes to reporting standards or eligibility rules.

Douglas Charnas: Well, Susan, thank you. This is very helpful information. These new deductions will help employees. Of course, the trade-off is that they impose new requirements on employers.

McGlinchey has prepared tax insights that set forth practical steps for employers to follow for the deduction for overtime pay. A team of McGlinchey lawyers is ready to assist you with any tax and employment issues that you may have.

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