On July 4, 2025, the One Big Beautiful Bill Act of 2025 (OBBBA) was signed into law. Shortly after, the IRS released official guidance explaining how the new “No Tax on Overtime” provision works.
This is more than just a tax change — it’s a payroll reporting change that requires precise tracking. At VertiSource HR, we’ve already reviewed the IRS rules, updated our payroll systems, and prepared our clients for both the immediate and future impacts.
What the IRS Rule Actually Says
According to the IRS Fact Sheet (FS-2025-03), the new deduction:
- Applies only to the overtime premium — the extra 50% paid under FLSA “time-and-a-half” rules. Base pay is not part of this deduction.
- Has a cap of $12,500 per year for single filers and $25,000 for married couples filing jointly.
- Phases out for incomes above $150,000 (single) or $300,000 (joint) by $100 for every $1,000 over the limit until the benefit is gone.
- Requires that the overtime premium be reported on an IRS information return, such as Form W-2.
- Can be claimed by both standard deduction and itemized filers.
Source: IRS Fact Sheet FS-2025-03, July 25, 2025 update
2025 Is a Transition Year
The IRS has clarified that nothing changes in paychecks for 2025:
- Federal income tax will still be withheld from overtime pay.
- The deduction is claimed when employees file their 2025 federal tax return in 2026.
- Social Security, Medicare, and FUTA taxes still apply.
Employers and payroll providers are required to track the qualified overtime premium internally in 2025, but employees will not see a separate line on their paychecks.
Source: IRS News Release IR-2025-82, Aug. 7, 2025
Why This Matters for Payroll Reporting
Even though employees won’t see a new line item on their paychecks in 2025, the IRS requires employers (or payroll providers) to track qualified overtime premiums behind the scenes.
- For 2025, this tracking ensures the total overtime premium can be included on year-end reporting furnished to employees (e.g., Form W-2 or an IRS-approved statement).
- The IRS has announced that no changes to Forms W-2, W-3, or withholding tables apply in 2025, but it is working on updated reporting for Tax Year 2026.
- VertiSource HR has already updated payroll coding to capture this information, so your year-end W-2 reporting will be accurate without any extra work required.
Sources: IRS Fact Sheet FS-2025-03; IRS News Release IR-2025-82; IRS OBBBA Provisions Page, Aug. 7, 2025
2026–2028 Guidance
The IRS has confirmed this deduction applies through tax year 2028. Beginning in 2026, new reporting updates are expected on Forms W-2 and 1099 to reflect this change more explicitly.
If federal withholding tables are updated in future years, employees may need to adjust their Form W-4 to see higher take-home pay during the year. Until then, the benefit remains a year-end tax deduction.
VertiSource HR will continue to monitor IRS announcements and implement any required changes immediately.
Action Steps for Employers
- No action required — payroll coding and reporting have already been updated.
- W-2s will include qualifying overtime premiums automatically.
- Communication tools will be available to help explain the deduction to employees.
Action Steps for Employees
- Your W-2 in 2026 will show the total qualifying overtime premium for your tax return.
- Remember: the deduction applies only to the premium portion of overtime, not your base pay.
- Social Security, Medicare, and state taxes still apply.
- Paychecks for 2025 will look the same — the tax savings come at filing.
VertiSource HR’s Commitment
Our payroll and compliance teams continuously monitor IRS releases. We don’t just read the headlines — we study the fine print, cross-check every IRS publication, and update our systems before most employers even know a change is coming.
That means our clients can be confident that reporting is correct, compliance is maintained, and employees will receive the full benefit they’re entitled to.
Bottom Line
The No Tax on Overtime deduction can mean meaningful year-end savings for employees — but only if payroll reporting is accurate. For 2025, paychecks won’t change, but tax returns will.
At VertiSource HR, we’ve already built these changes into payroll so our clients don’t need to lift a finger. If you want peace of mind knowing your payroll is always compliant and ahead of IRS changes, connect with VertiSource HR today to see how we can support your business.
Schedule a Consultation with VertiSource HR
Sources
- IRS Fact Sheet FS-2025-03, One Big Beautiful Bill Act: Tax deductions for working Americans and seniors (July 25, 2025 update)
- IRS News Page, One Big Beautiful Bill Act of 2025 provisions (Aug. 7, 2025) — Sec. 70202 “No tax on overtime”
- IRS News Release IR-2025-82, IRS announces no changes to individual information returns or withholding tables for 2025 under the One Big Beautiful Bill Act (Aug. 7, 2025)
- IRS Publication 15 (2025), Employer’s Tax Guide
- IRS Publication 505 (2025), Tax Withholding and Estimated Tax
