If you earned overtime pay, a new federal tax law may reduce your tax bill — but only if it’s calculated correctly.

The One Big Beautiful Bill Act (OBBBA) introduced a temporary overtime tax deduction for tax years 2025 through 2028. While the opportunity is real, the rules are technical and often misunderstood. Many taxpayers assume all overtime pay qualifies — which can lead to costly mistakes.

This is where working with a CPA becomes critical.

What Is the New Overtime Tax Deduction?

The OBBBA allows eligible taxpayers to deduct the premium portion of overtime pay from their federal taxable income.

Important:
This deduction does not apply to all overtime wages — only the extra pay above your normal hourly rate.

What Part of Overtime Pay Is Deductible?

Most overtime is paid at time-and-a-half, meaning:

• 1× your regular hourly pay

• plus an extra 0.5× premium

👉 Only the premium portion qualifies for the deduction.

Example:

• Regular rate: $20/hour

• Overtime rate: $30/hour

• Deductible amount: $10/hour

If your pay stub shows a single “overtime” line, the IRS assumes:

• ⅔ is regular pay

• ⅓ is premium pay

That’s why IRS guidance often refers to dividing overtime pay by three to determine the deductible portion.

Who Is Eligible for the Overtime Deduction?

You may qualify if:

• Your overtime is required under federal labor law (FLSA)

• You are a non-exempt employee

• Your income is below the phase-out thresholds

Income Phase-Outs

• Starts at $150,000 (single filers)

• Starts at $300,000 (married filing jointly)

Deduction Limits

• Up to $12,500 per tax return

• Up to $25,000 for joint filers

Common Overtime Deduction Mistakes

This deduction sounds simple — but it isn’t. Common errors include:

❌ Deducting total overtime pay instead of the premium portion
❌ Misreading pay stubs or employer summaries
❌ Claiming overtime that does not qualify under labor law
❌ Ignoring income phase-outs
❌ Missing documentation if the IRS requests proof

Any of these can reduce your deduction, delay your refund, or increase audit risk.

Why a CPA Makes a Difference

A CPA does more than enter numbers — they apply IRS rules correctly and protect you.

A CPA will:

• Verify whether your overtime is legally “qualified”

• Separate regular pay from premium pay accurately

• Review pay stubs and employer reporting

• Apply income phase-out rules properly

• Coordinate this deduction with other tax benefits

• Reduce audit risk by following IRS guidance precisely

For many taxpayers, this results in a larger, safer deduction — and peace of mind.

Should You Claim the Overtime Deduction?

If you worked overtime, this deduction may be valuable — but only if handled correctly. The IRS focuses on technical definitions, not how employers label pay on a paycheck.

Working with a CPA ensures your return is:

• Accurate

• Compliant

• Optimized

📞 Have questions about your overtime pay or eligibility?
A CPA can review your situation and help you claim the deduction correctly — the first time.