Only the “Premium” Portion Qualifies
Example: If your regular wage is $20/hour, your overtime rate is $30/hour. Under this law, the base $20 is still taxed normally. Only the extra $10/hour premium qualifies for the federal deduction.
Caps and Income Phase-Outs
The law is designed primarily for low- to middle-income earners and features strict limits:
- Maximum Annual Deduction: Eligible individual filers can deduct up to $12,500 of qualified overtime premium pay ($25,000 for married couples filing jointly).
- Income Caps: The benefit begins to phase out completely if your Modified Adjusted Gross Income (MAGI) exceeds $150,000 ($300,000 for joint filers).
You Still Pay Payroll and State Taxes
The OBBBA only provides a deduction against federal income taxes. It explicitly does not exempt your overtime wages from payroll taxes. You and your employer must still pay your standard shares of:
- Social Security (6.2%)
- Medicare (1.45%)
- Applicable state and local income taxes (unless your specific state has chosen to conform to the new federal rule)
For current tracking and future filing, the IRS has introduced updates to payroll reporting—such as utilizing Box 12 on Form W-2 (using code “TT”)—to help employers explicitly state an employee’s total qualified FLSA overtime compensation.
If you don’t see the code on your W-2 but you worked overtime, use the last paystub of the year. It will show how much overtime was paid.