No Tax on overtime

[Ksantin]

Hello,

I understand that the no tax on overtime law goes into effect for the 2025 tax year, and I understand that the calculation is tax free for the x.5 of the x1.5 OT pay rate. In California, we also make double time, can you please explain how x2 DT pay rate is taxed as part of this new law?

Finally, will the W2 reflect the salary amount made from overtime & double time? Or will we need to calculate this ourselves?

Thank you!

[DawnC · Accepted solution]

It should be broken down into the pay-differential components on your wage and tax summary (w-2).   You should not need to calculate anything yourself.

On your federal return, double-time pay (2x) generally doesn't qualify for the deduction because it's extra pay beyond the required premium.  Only the standard overtime hours (over 40 in a week, paid at 1.5x) generate a deductible premium under OBBBA rules.  

California is more strict, and all CA state taxes, including overtime taxes, still apply.  California's daily overtime rules might not fully qualify for the federal deduction if the overtime is not required by the FLSA (the U.S. Fair Labor Standards Act).

[Ksantin]

Thank you!

quick follow up,

Since the double time is still qualifying overtime hours, is doesn’t seem right that it wouldn’t qualify at all for federal OBBBA deductible. Would it instead get taxed on the x1.5 and the additional x.5 pay is tax free? Similar to standard x1.5 over time?

[AmyC]

OBBBA allows for the deduction of overtime pay required by the Fair Labor Standards Act - which is 1.5 times pay over 40 hours. Since your employer pays more than that, the excess is not deductible under OBBBA.

The regular pay portion isn't deductible for overtime but the 0.5 portion is deductible due to the Fair Labor Standards Act provided you meet the other requirements. A single person can deduct up to $12,500 for income up to $150,000. Married couples have $25,000 deduction on income up to $300,000. There is a phase out range that reduces the deductions by $100 for every $1,000 over the income limit.