The One Big Beautiful Bill Act (OBBBA) provides, among many new legislative changes, a new tax deduction for employees who work overtime hours. In 2025, employees were eligible to deduct up to $12,500 in qualified overtime premiums from their taxable income. This includes overtime required by the Fair Labor Standards Act (FLSA) but does not include any state law overtime or more generous overtime provided under a collective bargaining agreement. These deductions are also limited strictly to the overtime premium pay amount. This does not include the normal pay they receive during overtime hours.
At first blush, the OBBBA’s overtime deduction may sound like a win-win: employees keep more money, and employers do not have to do much more than keep payroll moving. Not so fast. The deduction is narrower than it may appear because it applies only to the FLSA-required overtime premium, not every overtime dollar that shows up on a paycheck. For employers, that distinction matters because it can affect payroll administration, broader compensation decisions and employee expectations.
Where Employers May Get Tripped Up
First, not all “overtime” is created equal. If premium pay exists only because of state law, a collective bargaining agreement, or company policy, it may not receive the same federal tax treatment as FLSA overtime. Employees, of course, are unlikely to draw those distinctions on their own. They will see overtime on the paystub and assume it all works the same way. That means employers may need tighter payroll tracking and clearer employee communication than they first expected.
Second, the deduction may complicate exempt-status decisions at the margins. If an employee moves from non-exempt to exempt, the employee generally loses overtime premiums and, along with them, the related deduction. That does not mean employers should avoid reclassification when it is otherwise appropriate. It does mean, however, that employers should take a hard look at what the employee has actually been earning, including regular overtime, before deciding that a new salary is sufficient.
What Should Employers Do Now?
- Review payroll practices to make sure FLSA overtime premiums can be separated from other premium pay.
- Flag any state-law overtime rules that may create employee expectations the federal deduction does not actually satisfy.
- Before moving employees from non-exempt to exempt, compare the proposed salary to what those employees have really been earning, not just their base rate.
- Make sure managers and HR are ready to explain, in plain English, why not all overtime will be treated the same.
The Labor & Employment team at Bricker Graydon Wyatt continues to monitor both the IRS and DOL rules and guidance surrounding the new reporting requirements. Make sure you subscribe to our Employment Law Report blog!
