What does the One Big Beautiful Bill do for employees?
The One Big Beautiful Bill Act has made a notable change for American workers. It now allows a federal tax deduction on overtime wages. For the first time, employees who put in extra hours can reduce their taxable income specifically based on the overtime they earn.
Starting with tax year 2025 and running through 2028, the bill permits workers to deduct up to $12,500 of overtime pay from their federal taxable income. Married couples filing jointly can deduct up to $25,000. This isn’t a tax credit or an exemption from payroll taxes. It does reduce the amount of income subject to federal income tax—effectively lowering the tax burden on those overtime earnings.
Sounds great! Are there limitations?
However, the deduction does phase out at higher income levels. Single filers earning more than $150,000 and joint filers earning more than $300,000 will gradually lose eligibility. Also, this is a deduction taken when the employee files and employers must continue to withhold taxes on overtime wages. This also does not apply to state or local taxable earnings–only federal.
If an employee makes $25/hour and works an average of 5 hours overtime per week, that translates to a $9,375 deduction from their taxable earnings. That drops their tax bill by $2,062. However, someone making $18.90 who works an average 6.5 hours/week of overtime, will still have the $9,375 credit, but it will only knock $1,125 off their tax bill.
What’s left to find out?
We don’t yet know how this will be reported on the W-2, but it’s a safe bet it will be a code in Box 12 or 14. There is also a chance that there will be some withholding rule in place by the 2026 tax year. It is a little tricky due to the sliding scale that applies to the maximum deduction based on total earnings. However, the Treasury Department has a goal of allowing employees to keep more of their paychecks. They may find a good way to take this deduction across the year. We’ll be sure to stay on top of the developments and do our best to keep you informed.
As always, if you have any questions, don’t hesitate to ask!