President Trump signed H.R. 1 (commonly known as, the One Big Beautiful Bill) into law on July 4, 2025, which includes a no tax on overtime provision effective January 1, 2025 through December 31, 2028.
Under H.R. 1, employees can take an above the line deduction for “Qualified Overtime.” The deduction is subject to annual caps and phaseouts based on adjusted gross income.
What do employers need to know?
1. “Qualified Overtime.” Only overtime pay required by Section 7 of the FLSA—meaning payment for hours worked beyond 40 in a workweek—can be deducted by an employee. Extra pay that isn’t mandated by the FLSA doesn’t count as Qualified Overtime for purposes of the employee’s ability to exclude such pay from taxable income. For instance, if an employer pays overtime for any hours over eight in a single day, that kind of “overtime pay” cannot be deducted under H.R. 1.
Additionally, only the half-time portion of the otherwise eligible overtime premium can be deducted by the employee. Overtime pay is calculated as 1.5 times the regular rate, but only the extra 0.5 times the regular rate—the premium portion—is deductible, not the full 1.5 times amount.
2. Reporting Requirements. Starting in 2026, employers must keep records of Qualified Overtime and report any qualified overtime on employees’ W-2 forms. The IRS Form W-2 will be revised for 2026 to allow employers to report Qualified Overtime paid to employees.
Employers should evaluate their pay codes and pay practices to ensure that such premium pay is being calculated correctly and can be separated out for reporting purposes starting next year.
3. 2025 Transition. As mentioned above, the new no tax on overtime provision is effective January 1, 2025, and therefore eligible employees can take the deduction on their 2025 taxes. Because this is a new requirement, the IRS has issued guidance about the appropriate way employers can estimate the qualified overtime and provide that information to requesting employees (given the fact that employers are not required to report qualified overtime for 2025 on the W-2).
The IRS guidance, geared towards employees, illustrates that an appropriate method for estimation is taking the total overtime paid to employees in 2025 (paid at 1.5 x regular rate) and dividing it by 3 to get the Qualified Overtime. If an employer paid overtime at a rate of 2x the regular rate (for example if there was a shift premium for Sunday work), then the overtime paid for that work should be divided by 4 to determine the Qualified Overtime.
As always, don’t hesitate to contact Ruder Ware’s employment law team with any questions and be sure to stay up to date on all of the impacts of H.R. 1.
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