The IRS has issued new guidance outlining how workers can claim the overtime pay deduction introduced under the One Big Beautiful Bill (OBBBA) for tax year 2025. This provision—one of the more worker-focused components of the new law—offers a significant benefit to hourly employees and other workers who regularly earn overtime pay.
For CPAs and tax advisors, this deduction introduces new planning opportunities—and payroll reporting complexities—for the year ahead.
The IRS and Treasury released Notice 2025-69, guidance for individual taxpayers on how to calculate and claim the qualified overtime deduction for 2025, alongside Notice 2025-62, which gives employers and payors transitional relief from certain information-reporting penalties under IRC §§6721 and 6722 for the 2025 tax year while payroll systems catch up to the new reporting requirements.
The overtime deduction applies to the portion of overtime pay that exceeds an employee's regular rate of pay, the "half" in "time-and-a-half," not the full overtime payment. It is capped at $12,500 per year for single filers and $25,000 for joint filers, and it phases out for taxpayers with modified adjusted gross income above $150,000 ($300,000 for joint filers). Qualifying amounts may be sourced from Form W-2 or Form 1099. This is a separate deduction from the qualified tips deduction (capped at $25,000, same phase-out thresholds), not a shared pool between the two. Both deductions apply for tax years 2025 through 2028 under OBBBA.
Tax advisors working with small business owners should verify that payroll providers are updating software to properly categorize and report overtime wages for 2025 W-2 forms.
Clients with hourly jobs who regularly work overtime stand to benefit most, particularly those under the MAGI phase-out thresholds. Advisors should start tracking eligible earnings early in the year to maximize deductions come filing season.
Unlike many above-the-line deductions, the overtime deduction can be taken in addition to the standard deduction, increasing its value across income levels.
Notice 2025-69 answers the core calculation questions, but open items remain: how employers should document the overtime premium separately from regular wages on future-year forms, and what additional guidance Treasury will issue as the 2025 transitional relief under Notice 2025-62 winds down. Firms should expect follow-up guidance before the 2026 filing season.
This deduction offers a rare tax planning opportunity built around earned effort, not asset ownership. For hourly workers, the overtime provision could lead to real, measurable tax savings if properly tracked, reported, and claimed.
Bizora AI will soon auto-detect overtime-eligible earnings from client data and flag deduction opportunities as part of its 2025 strategy engine.
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