"One Big Beautiful Bill" Act :
Decoding Overtime Premium Reporting
There are lots of questions surrounding Overtime Reporting as employees are doing their 2025 taxes. Send this guide to your employees and below, find guidance for you as we navigate these changes.
Decoding the Details for 2025 Taxes
The Overtime Premium deduction typically covers the difference between regular and overtime pay. For example, if an employee’s regular pay is $20 an hour and their overtime rate is $30, they can deduct the $10 difference. So, if the employee worked 10 hours of overtime, they would be able to deduct $100.
Overtime Tax Free
This does not mean all overtime pay is tax-free. Only the overtime premium portion (the extra 0.5× paid on overtime hours) MAY be exempt from federal income tax. The straight-time portion of overtime pay would still be taxed like regular wages.
Box 14 – Other
Box 14 is labeled “other” and is used by employers to report additional tax information that doesn’t fit into the standard federal boxes.
Your employees may have a number listed in Box 14 for Estimated Overtime Premium. This number is an calculation and is truly an estimate. Employees should verify by comparing it to the overtime listed on your last paystub of 2025 x 1/3 (see calculations tab). Remember, Box 14 is INFORMATIONAL.
Exempt vs Non-Exempt
Non-Exempt Employees are eligible for overtime pay. These employees are typically hourly but can also be salaried. They must be paid 1.5× for hours worked over 40 in a workweek. Overtime eligibility is based on job duties + pay, not just how they are paid. Examples include administrative support, technicians, non-supervisory staff, customer service, and many other hourly roles.
Exempt Employees are NOT eligible for overtime pay. To be exempt, an employee generally must meet all three:
- Salary basis – paid a fixed salary
- Salary level – paid at least the federal minimum threshold
- Duties test – primary duties are executive, administrative, or professional
Common examples include managers, professionals such as CPAs, attorneys and engineers, HR, finance, and operations leaders with decision-making power. Title alone does not make someone exempt.
Biggest misconception (important)
If someone is a salaried employee, that does not necessarily mean they are exempt. An employee can be salaried and non-exempt (still owed overtime), or hourly and exempt (rare, but possible in limited cases).
Here are some requirements to keep in mind for the overtime deduction:
- You can’t file your taxes using the filing status Married Filing Separately.
- The deduction applies to non-exempt employees who receive “required overtime” pay under federal overtime law.
- The deduction starts to phase out if your income is over $150,000 ($300,000 for Married Filing Jointly).
- Those with income over $275,000 ($550,000 for Married Filing Jointly) won’t qualify for the deduction.
Where can employees find the YTD Overtime?
The best resource for YTD overtime will be theirlast pay stub of 2025.
Why is it being multiplied by 1/3?
If overtime pay equals 1.5× regular rate, then the premium portion is 0.5. The total overtime rate is 1.5, so the premium as a share of total OT pay is 1/3 or 33.3%. This number represents the overtime premium portion embedded in time-and-a-half pay.
The Breakdown Details
When someone earns overtime, they’re paid 1.5×, which is actually two parts:
- Straight-time pay (1.0×)
→ treated like normal wages
→ still fully taxable - Overtime premium (0.5×)
→ this is the “extra” part
→ this is the part OBBBA targets
Only that premium portion is what would be “tax-free.”
Example
Employee makes $20/hour, works 10 hours of overtime
Normal OT pay
- OT rate = $30/hour (1.5 x $20)
- 10 hours × $30 = $300
Split it out
- Straight time: 10 × $20 = $200(still taxable)
- OT premium: 10 × $10 = $100(this is the part potentially income-tax free)
So only $100 would be exempt from federal income tax — not the full $300.
Employer Considerations for 2026
What is FLSA overtime?
Under the Fair Labor Standards Act (FLSA), non-exempt employees must be paid time-and-a-half (1.5×) for all hours worked over 40 in a single workweek. Overtime pay is calculated using the employee’s regular rate of pay, which may include wages, nondiscretionary bonuses, commissions, and shift differentials. Only actual hours worked count toward overtime; paid time off such as vacation, sick, or holiday hours does not.
✅ Hours that count toward overtime (hours worked)
- Regular work hours
- Required meetings or training
- Certain on-call time (when the employee cannot use time freely)
- Job-related travel during the workday
❌ Do NOT count toward overtime
- Vacation, sick, holiday, or PTO
- Jury duty or bereavement pay
- Other paid but unworked hours
These hours may be paid, but they do not push an employee over 40 for FLSA overtime.