Overtime Tax Deduction
What it means to me:
The "One Big Beautiful Bill Act", signed into law on July 4, 2025, includes a provision called “No Tax on Overtime”, which introduces a federal income tax deduction for certain types of overtime pay. The provision has no impact on employee paychecks, as it does not reduce immediate withholding taxes.
You can visit the IRS website for additional information.
Overtime Tax Deduction FAQ
This deduction is effective for calendar years 2025 through 2028.
Employees who receive overtime pay under Section 7 of the Fair Labors Standards Act (FLSA). This applies to University of Kansas employees who are hourly and entitled to 1.5 times their hourly rate for hours physically worked over 40 in a week.
No, overtime wages are still subject to withholding taxes (Social Security, Medicare, etc.). The deduction applies when an employee files their tax return.
The University of Kansas is still required to withhold federal income taxes based on the employee’s W-4 elections.
The only qualified earnings are those associated with FLSA required overtime.
No, only the “half” portion (.5) of the overtime qualifies for the deduction.
The deduction is claimed when an employee files their tax return. This is an above-the-line deduction, meaning it is available regardless of whether an individual itemizes their deductions or not.
Yes, the maximum deduction is $12,500 for single filers and $25,000 for joint filers, subject to applicable reductions based on adjusted gross income.
When reviewing your Paycheck in Employee Self Services in HR/PAY, you will see the following section:
Find the Year-to-Date column for Overtime Pay. Multiply the Earnings amount by 0.33333. The result will be your total overtime deduction amount (subject to rounding).
No. FLSA Exempt employees do not qualify for overtime, so the deduction does not apply.
Yes, each employee with qualifying overtime will receive a notice providing them with the deduction amount at the end of the calendar year. The method of notification has not yet been determined by the IRS. Additional information will be provided once the process has been finalized. The notification will either be through a direct notification to the employee, noted on the W-2, or both.
No. When you accrue and use comp time, the hours are considered regular earnings. Comp time payouts are not considered overtime pay.
Printer Friendly PDF (via SharePoint)