Federal Tax Overtime Implication on 2025 W2s

HR Question: What do I need to do for the 2025 W2s for compliance with the new Federal Overtime Pay Deduction rule?

HR Answer: First, as a general overview, Section 70202 of the One Big Beautiful Bill Act (OBBBA) creates a new above‑the‑line tax deduction for qualified overtime compensation. Beginning in 2025, overtime pay required under Section 7 of the Fair Labor Standards Act (FLSA) is exempt from federal income tax. This means workers can deduct the federal overtime premium portion of their pay directly from their federal income taxes.

Individuals are subject to an annual deduction cap of $12,500 for single filers and up to $25,000 for married couples filing jointly. There is also an income phase-out that applies. For every $1,000 a taxpayer’s modified adjusted gross income exceeds $150,000 (single), or $300,000 (joint), the deduction is reduced by $100. High‑income earners may, therefore, lose the deduction entirely.

Please select this link to read the complete blog post from OSAP Member Clark Schaefer Strategic HR.