One Big Beautiful Bill: No Tax on Overtime Explained

The One Big Beautiful Bill (OBBB) has quietly introduced one of the most consequential payroll-related tax changes in years: a new federal income tax deduction for qualified overtime compensation. While this law does not change how overtime is paid, it does introduce a new compliance requirement – employers must now accurately calculate and document the overtime premium portion of pay for tax purposes. In construction, where accuracy and documentation are mission-critical, this law adds a new layer to get payroll right.

This guide explains what the “no tax on overtime” provision actually does, when it applies, who qualifies, and how overtime deductions should be calculated and documented. Most importantly, it clarifies how contractors can comply with OBBB without disrupting payroll operations, paystubs, or employee trust.

We’ll cover what the law is, how it works in practice, key eligibility rules, documentation expectations, and how Miter helps reduce operational friction as these requirements roll out.

What is the “no tax on overtime” provision and how does it work?

The One Big Beautiful Bill “no tax on overtime” provision creates a new federal income tax deduction for qualified overtime compensation. Under this provision, employees may deduct their overtime premium, specifically the portion of overtime pay that exceeds their regular rate.

The deduction is capped at:

• $12,500 per year for single filers
•  $25,000 per year for married couples filing jointly

It  begins to phase out at higher income levels, starting at the modified adjusted gross income above $150,000 for single filers and $300,000 for joint filers.

This deduction applies to federal income tax only and does not change payroll tax obligations; overtime remains subject to Social Security and Medicare taxes.

In short, OBBB introduces a tax reporting classification, not a new way to calculate or pay overtime. The operational requirement for payroll teams is identifying and summarizing the portion of overtime that qualifies for tax reporting.

What qualifies for the overtime deduction?

Only a specific category of overtime qualifies for the deduction created by the One Big Beautiful Bill. This distinction is especially important in construction, where payroll often includes multiple types of overtime and premium pay.

Qualified overtime only includes:

• Weekly overtime paid to non-exempt employees for hours worked over 40 in a single workweek, as required under the Fair Labor Standards Act (FLSA)
• The overtime premium portion, specifically the amount paid above the employee’s regular rate of pay

The following types of overtime and premium pay are not considered qualified overtime under the “no tax on overtime” provision, even if they are labeled as overtime on a paystub:

• Overtime paid solely because of state or local law (e.g., daily thresholds)
• Overtime or premium pay paid voluntarily or under union contracts
• Overtime paid to exempt employees
• Holiday/weekend/shift premiums not tied to federal overtime

This distinction is critical for both employers and employees. Not all pay labeled as “overtime” qualifies for the federal overtime deduction, and misunderstanding this can lead to incorrect expectations or reporting errors.

When does the “no tax on overtime” deduction start?

The qualified overtime deduction applies to tax years 2025 through 2028, with 2025 serving as a transition year.

For the 2025 tax year, the IRS has confirmed there are no changes to Form W-2, and employers are not required to separately report qualified overtime on 2025 W-2s. However, because the deduction is in effect, employees may still claim it when filing their 2025 returns.

To support accurate filings, the IRS encourages employers to provide employees with an estimate of qualified overtime, even though it is not mandatory. This estimate can be provided in one of two ways:

• An informational amount in W-2 Box 14, or
• A separate year-end statement that breaks down earnings

If an employer does not provide an estimate, employees may still claim the deduction using reasonable documentation such as pay statements. As a result, having a clear, consistent way to provide estimates in 2025 will help reduce employee confusion, questions, and the risk of inconsistent self-reported amounts.

Beginning in 2026, the IRS expects updated tax forms with standardized reporting for qualified overtime, making this information directly available on the W-2.

How to calculate your overtime deduction

This process explains how qualified overtime compensation is calculated under the One Big Beautiful Bill. Payroll managers can use it to calculate and report QOC for their teams, and employees can use it to understand their potential overtime deduction amount.

1. Identify federally required overtime

Start by identifying overtime that qualifies under the Fair Labor Standards Act. This generally means hours worked over 40 in a workweek by non-exempt employees and the pay tied to those hours. Overtime paid only because of daily state rules, union agreements, project-specific daily overtime, or voluntary double time does not qualify.

2. Confirm the regular rate and overtime calculation

Verify that overtime was calculated at at least 1.5 times the employee’s regular rate. The regular rate includes nondiscretionary bonuses and commissions, not just base hourly pay. Any errors should be corrected first, since QOC is based on the true federal overtime premium.

3. Separate the overtime premium from straight-time pay

For each overtime workweek, split overtime pay into straight-time pay and the additional premium paid above straight-time. For time-and-a-half overtime, the premium portion is typically about one-third of the total overtime pay.

4. Total qualified overtime for the year

Add up the overtime premium amounts across all pay periods in the year. Payroll teams maintain this year-end QOC total, and employees use it to estimate or claim their overtime deduction.

5. Review how QOC is communicated

For 2025, QOC may be shown as an informational amount on the W-2, often in Box 14, or provided in a separate year-end payroll statement. Payroll teams are not responsible for determining whether an employee qualifies for the deduction, only for reporting QOC accurately.

Navigate OBBB overtime compliance with Miter

Miter makes OBBB compliance simple by handling qualified overtime tracking behind the scenes, without changing how payroll is calculated or processed.

There are no earning code changes, configuration updates, or manual workarounds required. Miter identifies and calculates federally qualified overtime alongside your existing overtime rules, while payroll calculations and withholdings remain unchanged. Miter clearly surfaces the portion of each employee’s overtime that qualifies under the “no tax on overtime” provision.

For the 2025 tax year, Miter provides employees with a year-end qualified overtime summary they can use to estimate their deduction.

For the 2026 tax year and beyond, Miter supports the standardized W-2 reporting for qualified overtime requirements required by the OBBB.

Teams using Miter can rest easy with the confidence that they are compliant with changing tax regulations and are supporting their teams.

Frequently asked questions

Does this mean overtime pay is no longer taxed?

No. Overtime wages remain fully subject to payroll taxes and withholding. The OBBB allows eligible employees to deduct the qualified overtime premium when filing their federal income tax return.

How should qualified overtime be handled when employees have a blended or weighted regular rate?

When multiple pay rates apply in a week, the regular rate must be calculated using a weighted average. The qualified overtime premium is then determined using that blended rate, and only the federally required portion qualifies for the deduction.

Is daily overtime included in the OBBB overtime deduction?

No. Daily overtime required by state or local law does not qualify. Only weekly overtime over 40 hours under federal law is eligible.

Does prevailing wage overtime qualify for the OBBB deduction?

Only the federally required overtime premium qualifies. Additional overtime or premiums required by prevailing wage rules do not qualify unless they overlap with federal weekly overtime.

Will the OBBB overtime deduction exist after 2028?

Under current law, the deduction applies to tax years 2025 through 2028. Any extension or change would require new legislation.

Does Miter support OBBB overtime deductions?

Yes. Miter supports OBBB overtime deductions by calculating and tracking federally qualified overtime without changing how payroll runs. For 2025, Miter provides reporting and a year-end qualified overtime summary to help employees estimate their deduction. Beginning in 2026, Miter supports standardized W-2 reporting for qualified overtime as IRS requirements take effect.