Among other employment measures, July’s One Big Beautiful Bill Act gives FLSA non-exempt workers a limited ability to deduct overtime pay from their federal taxes, retroactive to July 1, 2025. Deductible overtime excludes the straight-time portion of such pay, and also does not include shift, weekend, or holiday overtime required under state law or voluntarily provided by employers. In addition, the total amount of the deduction is capped based on employee income.

To date, the IRS has not issued rules implementing the new deduction. Earlier this year, the agency encouraged but has not mandated employers to provide employees with the amount of income eligible for the deduction. The IRS says that this amount could be noted in Box 14 of the 2025 W-2. Employers should be cautious about advising employees on the deductible amount. If this estimate is incorrect, employees could assert claims against the company in the event of an audit and penalties.

It is likely that for tax year 2026, the IRS will issue regulations and new forms that require disclosure of the amount of overtime eligible for the deduction. For this tax year, employers should decide how they will respond to employee questions about their overtime pay. Given the modest amount of the available deduction, employees who do not currently itemize deductions will likely not be incentivized to change based on this opportunity alone. However, additional changes to payroll tax law such as excluding tips from taxable income may push more workers to at least explore their filing options.

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