IRS Issues Guidance on New Overtime Pay Deduction: What Tax Pros Need to Know

Adam Tahir
Jul 17
2 min read

Introduction: A Deduction Designed to Reward Hard Work

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 certain retirees with part-time income.

For CPAs and tax advisors, this deduction introduces new planning opportunities—and payroll reporting complexities—for the year ahead.

What Happened?

New Deduction Available: Starting with tax year 2025, eligible taxpayers can deduct qualified overtime compensation from gross income, even if they claim the standard deduction.
IRS Guidance Issued July 17: The IRS clarified how employers should report overtime pay and what documentation taxpayers need to claim the deduction.
Eligible Earners: Workers with hourly wages (including seniors supplementing retirement income) are eligible, with caps based on income thresholds and hours worked.

Deduction Mechanics: What We Know So Far

Component	Description
Deductible Amount	Overtime wages earned beyond 40 hours/week, up to $10,000 annually
AGI Phaseout	Begins at $125,000 for individuals; $250,000 for joint filers
Applies To	Hourly workers, part-time workers, qualifying retirees with W-2 wages
Reporting	Employers must distinguish “base pay” vs. “overtime” on year-end W-2s (Box 14 guidance pending)
Effective Date	Applies to income earned on or after January 1, 2025

Why This Matters for Tax Professionals

1. Payroll Compliance and Client Coordination

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.

2. Tax Planning for Lower- and Middle-Income Earners

Clients with part-time or hourly jobs—especially those nearing retirement—stand to benefit most. Advisors should start tracking eligible earnings early in the year to maximize deductions come filing season.

3. Standard Deduction Compatibility

Unlike many above-the-line deductions, the overtime deduction can be taken in addition to the standard deduction, increasing its value across income levels.

Forward-Looking Considerations

Expect more guidance: The IRS is expected to issue proposed regs on substantiation requirements and reporting formats by Q4 2025.
Potential coordination with EITC: For clients who qualify for the Earned Income Tax Credit, the overtime deduction could reduce AGI while preserving EITC eligibility, a rare stacking opportunity.
Retirement income planning: Seniors working part-time should assess the deduction’s interaction with Social Security taxation thresholds.

Final Thoughts

This deduction offers a rare tax planning opportunity built around earned effort, not asset ownership. For hourly workers and seniors alike, 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.