2025 OBBA Overtime Premium

The One Big Beautiful Bill Act (OBBBA) allows eligible individuals to claim a federal income tax deduction for qualified overtime compensation received during tax years 2025 through 2028. Qualified overtime generally refers to the overtime premium portion of pay required under federal law.

IRS reference.

According to the IRS, qualified overtime compensation is the portion of overtime pay that exceeds your regular rate of pay and is required under Section 7 of the Fair Labor Standards Act (FLSA).

Example from the IRS:  If overtime is paid at time‑and‑a‑half, only the “half” portion is considered qualified overtime compensation.

You may be eligible if:

• You are covered by the FLSA and
• You are not exempt from overtime under federal law, and
• You worked more than 40 hours in a workweek, and
• You were paid overtime required under the Fair Labor Standards Act (FLSA)

Eligibility for the deduction ultimately depends on IRS rules and your personal tax situation.

You are not eligible for the OBBBA overtime deduction if:

• You are exempt from overtime under federal law
• You’re not covered by the FLSA
• You did not work more than 40 hours in a workweek
• The extra pay you received was not required under the FLSA, such as: 
  • Holiday pay
  • Daily overtime required only by state law
  • Voluntary premium pay or bonuses
  • Double‑time or special incentive pay

These types of pay are not considered qualified overtime under the IRS rules.

The IRS has confirmed that 2025 is a transition year, and Forms W‑2 for 2025 will not include separate reporting of qualified overtime compensation.

No.  The OBBBA overtime benefit does not automatically reduce your federal tax withholding during the year.

Any potential tax benefit is determined when you file your individual tax return.

Your overtime pay in 2025 was taxed the same way as regular wages, including:

• Federal income tax withholding
• Social Security and Medicare taxes

The deduction does not change how overtime is taxed on your paychecks.

No. Claiming the OBBBA overtime deduction is optional and depends on your individual tax situation. 

Yes. Beginning with tax year 2026, the IRS expects employers to separately report qualified overtime compensation on Form W‑2. The first W‑2 showing this information will be issued in January 2027.

No.  Texas State University cannot provide personal tax advice or tell employees whether they qualify for any tax benefit.

You may wish to consult:

• The IRS website for general information:
  • One Big Beautiful Bill Act Tax Deductions for Working Americans and Seniors
  • Questions and Answers about the New Deduction for Qualified Overtime Compensation
• A certified tax professional (CPA, tax preparer, or advisor)
• IRS‑sponsored Volunteer Income Tax Assistance (VITA) programs, if eligible

If you have questions please contact Payroll for assistance. We are happy to help.