OB3 - What You Need to Know (Pt. 2)
We’ve covered the tips deduction - let’s dive on into part two - the “Overtime” provision.
Important note: much of the marketing around this bill focused on eliminating tax on certain items. This is not the case for the actual tax law. The following serve to reduce taxable income by deduction, but it does not fully eliminate the taxability of these items.
Overtime Deduction
OB3 provided for a new tax deduction for qualified overtime - there’s that word again, qualified. What does that mean?
Qualified overtime is an amount paid out under the Fair Labor Standards Act (FLSA) for time worked in excess of your regular hours. Work 50 hours at a typical $20 per hour rate? Overtime on a 40 hour workweek sits at $300 pre-tax. Sounds simple right? Sort of - we need to take individual state laws (daily vs. weekly OT requirements) and other factors into consideration.
It’s important to note that the deduction only applies to the “half” in the “time-and-a-half” overtime pay. If we’re looking at the same example above, the overtime rate is $30 ($20 x 1.5). The only part of this pay that is deductible is the $10 difference between standard pay and overtime pay.
Only time-and-a-half rates are deductible - if you have a generous employer who pays 2x the rate, the deduction is limited to the 1.5 rate.
The Details
Applies to overtime pay received in tax years 2025 through 2028.
The total deduction is limited to $12,500 per tax year for single filers ($25,000 for joint filers) and it is a deduction subject to phase out limitations. If your adjusted gross income - that’s pre-standard deduction - is more than $275,000 ($550,000 for joint filers), you will see the total available deduction lower.
Married tax payers must file a joint return to receive this deduction.
You must include your social security number on your tax return - not available for ITIN holders.
What to Watch For
Employers & payroll providers will be required to update the W-2 to calculate qualified OT compensation after December 31, 2025. That means that for the 2025 tax year, employers can choose to break out qualified overtime or leave it to be the responsibility of the employee.
Our Recommendation
Pull your year-end paystub that shows regular wages versus overtime wages, holiday pay, etc. This is going to be the best documentation available for ensuring that your receiving the highest available deduction. We recommend pulling your paystub whether your employer voluntary reports OT or not. This deduction is so new and since the law was signed mid-year, it' is entirely possibly that there will be calculation errors.
Sources:
Gorczynski, Tom. Compass Tax Educators. Federal Tax Update (2025)
Wolters Kluwer, Federal Tax Updates (2025)
