tax forms upload docs
PHONE (323) 902-1000

Qualified Overtime Deduction (2025–2028)

What Employees, Business Owners, and High-Income Households Need to Know

The One, Big, Beautiful Bill Act (OBBBA) introduced a new federal tax benefit beginning in 2025: the Qualified Overtime Deduction under IRC §225.

At Velin & Associates, Inc., CPA Los Angeles, we are already advising both employees and business owners on how this provision affects compensation planning, payroll reporting, and year-end tax strategy.

While media headlines suggest “tax relief for overtime workers,” the technical rules are far more nuanced.

Below is a comprehensive breakdown — with practical examples relevant to our Los Angeles client base.

What Is the Qualified Overtime Deduction?

For tax years 2025 through 2028, eligible taxpayers may claim a below-the-line, non-itemized deduction of:

Important:
If married, the deduction is only available if spouses file jointly. Married Filing Separately taxpayers are not eligible.

This deduction reduces taxable income — but it does not eliminate payroll taxes.

What Counts as “Qualified Overtime”?

The definition is strictly tied to Section 7 of the Fair Labor Standards Act (FLSA).

That means:

✔ Overtime must be for hours worked over 40 hours per week
✔ Employee must be nonexempt and typically paid hourly
✔ Federal law governs — state definitions do NOT apply

Practice Pointer

California requires overtime for hours worked over 8 per day.

However, if an employee works:

Total = 40 hours

Even though California would treat 1 hour as daily overtime, this does not qualify under the federal overtime deduction because the employee did not exceed 40 hours for the week.

This distinction is critical for California taxpayers.

Only the “Premium Portion” Qualifies

IRS guidance (FS-2025-03) clarifies:

Only the amount above the regular rate of pay qualifies.

In other words, only the “half” portion of “time-and-a-half” pay is deductible.

Example 1: Hourly Employee

Jessica earns $30 per hour.

She works 50 hours in one week.

However, only the premium portion qualifies:

Premium = $45 − $30 = $15
Qualified overtime = 10 × $15 = $150

Only $150 is eligible for the deduction — not $450.

This is a common misunderstanding.

Phaseout for Higher-Income Taxpayers

The deduction phases out based on Modified AGI:

It is reduced by $100 for every $1,000 over the threshold.

Fully phased out at:

Example 2: Dual-Income Household

A married couple files jointly.

MAGI = $325,000

They exceed the $300,000 threshold by $25,000.

Phaseout = $2,500 reduction

If their allowable overtime deduction was $8,000, it would be reduced to $5,500.

High-income households must model this carefully.

Social Security Number Requirement

To claim the deduction:

Failure to provide a correct SSN is treated as a mathematical error, meaning:

The IRS can adjust the return without standard deficiency procedures.

This mirrors the enforcement structure used for the qualified tips deduction.

No Double Benefit

Taxpayers cannot claim the overtime deduction for amounts already treated as:

Overtime and tip deductions are separate provisions with separate rules.

Employer Reporting Requirements

Beginning in 2025:

Employers must separately report qualified overtime compensation on:

The IRS announced (IR-2025-82) that no W-2 format changes will occur for 2025, but guidance may be issued for 2026 and beyond.

There is transition relief under Notice 2025-62 for certain reporting failures — but compliance planning should begin now.

Why This Matters for Business Owners

If you operate:

And you have nonexempt hourly employees working overtime — your payroll systems must properly identify and track:

✔ Hours exceeding 40 per week
✔ Premium portion of overtime only
✔ Separate reporting requirements

This is not automatic in many payroll systems.

Interaction With Other Tax Provisions

The overtime deduction:

For high-income individuals in Los Angeles, this can affect:

California currently does not conform to this federal deduction.

Example 3: Warehouse Supervisor in E-Commerce Company

A Los Angeles e-commerce business owner operates through an S-Corp.

An hourly warehouse supervisor earns:

If eligible, the employee may deduct up to $6,000 — subject to income phaseouts.

The employer must separately track and report that $6,000.

Failure to do so creates risk for both employee and employer.

Strategic Considerations for 2025–2028

This deduction is temporary (2025–2028).

Planning considerations include:

✔ Income timing
✔ Filing status analysis
✔ Payroll compliance
✔ AGI modeling
✔ Interaction with other deductions
✔ Coordination with qualified tips deduction

For higher-income households, the phaseout range makes tax modeling essential.

The Bottom Line

The Qualified Overtime Deduction provides targeted relief — but:

Without careful analysis, taxpayers may:

Work With Professionals Who Understand Compensation Strategy

At Velin & Associates, Inc., CPA Los Angeles, we advise:

Tax law changes are rarely simple. Strategic implementation is what creates real savings. For more information about our tax planning services, contact us today: visit our website.

Velin & Associates, Inc

8159 Santa Monica Blvd STE 198/200 West Hollywood, CA 90046
323-902-1000
dmitriy@losangelescpa.org

CPA for YouTubers | CPA for Shopify Store | CPA for Commerce | CPA for Creators | Shopify Store CPA | CPA for Filmmakers | CPA for Amazon Business | Amazon Business CPA | CPA for Dental Practice | Dentist CPA | Dental Business CPA | Online Commerce CPA | CPA for TikTokers | CPA for Doctors | CPA for Medical Practice | CPA for High Net Worth Individuals | Tax services healthcare | Tax services for a business | Tax services tiktok | Tax services for commerce | Tax services Los Angeles | Bookkeeping and tax services | Tax preparation | Accounting Firm | Tax services for doctor | Tax services for entertainment | Online CPA | CPA Los Angeles



Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.

Have tax questions? Ask Us.

The first step to hassle-free accounting, tax returns, and tax planning starts by reaching out to one of our representatives.

PHONE (323) 902-1000
Schedule Appointment

Schedule a Consultation
at 323-528-1512 or request form