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Employment Law Update: New Overtime Tax Law Increases Employer Recordkeeping Obligation

Date: July 31, 2025
The Administration’s “Big Beautiful Bill” includes a new overtime tax provision, broadly described as “No Tax on Overtime.” More accurately, the Bill allows an employee tax deduction of a portion of overtime payments, up to a maximum deduction. Administering this new employee-benefitting tax deduction will require increased recordkeeping by employers. 

For 2025 through 2028, individuals who receive “qualified overtime compensation” (i.e., overtime required by law for hours worked over 40 by non-exempt employees in a single workweek) may deduct from the federal income tax the pay that exceeds their regular rate of pay – such as the “half” portion of “time-and-a-half” compensation. For example, an employee earning $18 per hour, and earning $27 per hour for hours worked over 40 hours in a single workweek, can deduct from federal income tax, $9 per hour for all overtime hours worked.

The maximum annual deduction for any employee is $12,500 ($25,000 for joint filers). The deduction phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers).

As such, there are new and immediate record-keeping obligations for employers who are now required to track all deduction-eligible overtime, identifying the employee half-time payments. This information will be reported on the employees’ W-2 annual income statement, which will now include a new overtime report category.

In a statement issued on July 14, 2025, the IRS wrote: “The IRS will provide transition relief for tax year 2025 for taxpayers claiming the deduction and for employers and other payors subject to the new reporting requirements.” Whiteford will continue to monitor and report on any emerging clarifications or “relief” announced by the IRS for 2025.
The information contained here is not intended to provide legal advice or opinion and should not be acted upon without consulting an attorney. Counsel should not be selected based on advertising materials, and we recommend that you conduct further investigation when seeking legal representation.