How “No Tax on Overtime” affects workers in California.

Written By Megan Kurashige

The One Big Beautiful Bill Act (OBBBA) was signed into law on July 4, 2025. It includes a section that mandates “no tax on overtime” by introducing a federal tax deduction for “qualified overtime compensation.”

This is obviously relevant for workers in the production industry, where overtime is common. However, it’s important to note that California and federal law define overtime differently. California often requires overtime pay when one works more than 8 hours in a day, while federal law only requires overtime pay when one works more than 40 hours in a week. The OBBBA deduction only applies to federally mandated overtime.

Important note: This page provides general information. It does not constitute legal or financial advice.

The OBBBA Deduction for Overtime

Starting January 1, 2025, and running through December 31, 2028, individuals who receive qualified overtime compensation, as required by the federal Fair Labor Standards Act (FLSA), may deduct the pay that exceeds their regular rate of pay. The FLSA defines overtime as more than 40 hours in a week and requires that overtime be paid at 1.5 times the employee’s regular hourly rate. Of this “time-and-a-half” compensation, the “half” portion is the overtime premium that exceeds the regular rate of pay. The OBBBA deduction only applies to this overtime premium.

Example:

For mathematical simplicity, let’s say your calculated hourly rate is $20/hour. 

You work 45 hours in a week. Since federal overtime is defined as more than 40 hours in a week, you have worked 5 federally mandated overtime hours.

  • 40 hours are paid at your regular rate of $20/hour. 40 x $20 = $800

  • 5 overtime hours are paid at 1.5x your regular rate, or $30/hour. 5 x $30 = $150

  • Your total gross pay: $800 + $150 = $950

The portion of your pay that is eligible for the OBBBA deduction is only the overtime premium, or the “half” of the “time-and-a-half” overtime rate.

  • The “half” portion of “time-and-a-half” is 0.5 x your regular $20/hour rate = $10/hour 

  • For your 5 overtime hours, the overtime premium = $50

For tax purposes, this means:

  • Your total gross pay = $950

  • Portion of overtime eligible for federal income tax deduction = $50

  • Total wages subject to tax: $900

Important details:

  • The OBBA deduction only applies to federal income tax. Overtime compensation is still subject to other mandated taxes, such as Social Security, Medicare, and applicable state taxes.

  • The OBBA deduction does not apply to state-specific overtime or double-time. It only applies to FLSA overtime requirements. California law often requires overtime for daily hours over 8 hours, while the OBBBA deduction is based on the FLSA’s weekly 40-hour standard. Workers with state-mandated daily overtime or double-time will continue to receive overtime pay and report it for state taxes, but only overtime that exceeds 40 hours in a work week will qualify for the OBBBA deduction.

  • For the 2025 tax year, there will be no changes to form W-2, but employers must track overtime and provide the qualified overtime premium amounts to workers. Workers will likely receive this information in a separate year-end statement or supplemental wage statement attached to the W-2.

Taxpayer Eligibility

In addition to the “qualified overtime” definition, there are certain eligibility requirements and restrictions.

Employment type:

The deduction is intended for wages that are subject to federal overtime rules under the FLSA. Most W-2 employees are eligible, but payments reported on a Form 1099 will rarely qualify since independent contractors are generally not covered by FLSA requirements.

Income thresholds:

Those with higher Modified Adjusted Gross Incomes (MAGI) may only be able to claim a partial deduction as the benefit begins to phase out starting at $150,000 (Single) / $300,000 (Married Filing Jointly).

Filing status:

The deduction is not available for individuals using the Married Filing Separately status. Additionally, the taxpayer receiving the overtime must have a valid Social Security number for work.

Labor regulations:

Your overtime must meet federal labor standards—typically time-and-a-half for hours worked beyond 40 hours per week.

Deduction Limits:

  • Up to $12,500 per year for single filers.

  • Up to $25,000 per year for married couples filing jointly.

Employer Responsibilities & Tax Reporting

Employers must track and report the overtime premium separately for each employee so workers can maximize deductions. Without clear reporting, CA daily overtime may inadvertently be excluded from the federal benefit.

Employers must report the qualified overtime pay on Form W‑2 to the IRS and furnish statements to employees. The IRS will offer transition relief for tax year 2025, allowing employers to use any reasonable methods specified by the IRS

For tax year 2025, there are no changes to W‑2 formatting or withholding tables. Employers will issue the standard W-2 form for 2025. 

IRS Announcements

The IRS anticipates providing further instructions in the months ahead, including how to communicate totals and track qualified overtime. However, they have already communicated a few announcements:

Megan Kurashige
Next

OSHA & Cal/OSHA Overview for Production