Understanding the One Big Beautiful Bill Act: Key Insights on Overtime Deductions

An Overview of the New Law

On July 4th, 2025, the President signed into law the One Big Beautiful Bill Act, commonly referred to as BBB. This legislation introduces several changes, particularly concerning individual deductions for overtime. In this week’s newsletter, I will discuss some of the more troubling areas I am hearing about. The law is encapsulated in the new Code Section 225, and it is essential to begin our discussion by quoting the opening section of the new law.

“There shall be allowed as a deduction an amount equal to the qualified overtime compensation received during the taxable year and included on statements furnished to the individual pursuant to section 6041(d)(4) (W2 requirement) or 6051(a)(19) (1099 requirement).”*

This direct quote clarifies a common misunderstanding, especially prevalent on social media and blog posts. The employer must designate the qualified overtime amount. If the employer does not identify this amount, the individual employee does not qualify for the deduction. Neither the employee nor the tax professional may estimate this amount!

Designating Qualified Overtime

How should the employer designate the amount for the employee? The IRS has announced that the 2025 W-2 will not change. However, they have indicated that qualified overtime will be noted in the 2026 W-2, Box 12, with Code TT for qualified overtime. This designation is not possible for 2025. Until the IRS provides more guidance, we suggest using either W-2 Box 14 or a statement attached to the W-2.

On July 14th, 2025, the IRS released FS 2025-03, which states that “Employers and other payors are required to file information returns with the IRS (or SSA) and furnish statements to taxpayers showing the total amount of qualified overtime compensation paid during the year.” We are still awaiting IRS guidance on how employers should report these amounts. The IRS statement also mentions, “Effective for 2025 through 2028, individuals who receive qualified overtime compensation may deduct the pay that exceeds their regular rate of pay – such as the ‘half’ portion of ‘time-and-a-half’ compensation – that is required by the Fair Labor Standards Act (FLSA) and that is reported on a Form W-2, Form 1099, or other specified statement furnished to the individual.” Thus, a W-2 attachment should suffice this year.

Determining Qualified Overtime

The bigger question, which causes the most confusion, is determining what qualifies as overtime. According to IRC Section 225(c)(1), the law states, “For purposes of this section, the term ‘qualified overtime compensation’ means overtime compensation paid to an individual required under section 7 of the Fair Labor Standards Act of 1938 that is in excess of the regular rate (as used in such section) at which such individual is employed.”

This means that unless an individual is specifically not allowed to be paid overtime according to the FLSA, many salaried employees could be converted to hourly rates and then paid overtime according to the FLSA at a rate of at least one and a half times their base rate for excess hours in a forty-hour week. So, which employees may not be paid an overtime rate?

Employees Exempt from Overtime

According to FLSA, the following employees are ALWAYS exempt from the overtime requirement and thus cannot receive the Overtime deduction:

• Computer analysts, programmers, software engineers paid at least $27.63 per hour

• Outside salespeople

• Lawyers

• Doctors

• Teachers

• Commissioned employees of retail or service establishments

• Railroad, air carrier, taxi drivers, employees of motor carriers, seamen

• Local delivery employees paid on tip rate plans

• Announcers, news editors, chief engineers of certain non-metropolitan broadcasting stations

• Domestic service workers living in the employer’s residence

• Employees of motion picture theaters

• Farmworkers

  
  

Conclusion

The One Big Beautiful Bill Act introduces significant changes to how overtime deductions are handled. It is crucial for both employers and employees to understand these changes thoroughly. Proper designation of qualified overtime is essential for employees to benefit from the new deduction. As we await further guidance from the IRS, staying informed and prepared is the best course of action.

For more insights and updates, consider following TaxSpeaker.

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