In July, President Donald Trump signed the One Big Beautiful Bill Act into law. The Act has tax and spending policies including new overtime pay tax rules that will add more compliance responsibilities to small and medium-sized business operations.
The new rule applies to employees who meet the following criteria: non-exempt under Fair Labor Standards Act, earn less than $150,000 per year, and those employees who document all overtime hours and pay. Those who are salaried will remain exempt.
Employers with employees who fit into these categories need to make sure that eligible workers have the correct classification and that overtime records are congruent with the changes back to Jan 1, 2025.
As with many federal laws, the “no tax on overtime” provision within the One Big Beautiful Bill will bring benefits to some and make tax filing more cumbersome to others. The tax change is expected to put more money into the pockets of 20 million workers who are eligible for overtime. Though keeping track of this internally will likely mean added work for those working in Human Resources (HR) and Payroll.
As this news filters down to the employee level, employers must be ready to manage requests for employee reclassifications, possible staffing changes and questions from employees about who is eligible for this new benefit.
One note of importance is that “no tax on overtime” is not an exemption. It is a tax deduction that will be sunset in 2028. During this period of 2025-2028, employees who qualify under the One Big Beautiful Bill Act will be able to deduct qualifying overtime compensation from their federal taxable income and on annual tax returns.
Overtime in the One Big Beautiful Act is defined as the extra compensation employees receive above their normal wages. It is not full-time and half-paid for working longer hours. Because the change is retroactive to Jan. 1, employees will be able to deduct this on their 2025 tax return.
Deductions range from up to $12,500 or $25,000 for married couples who file jointly. The deduction phases out incrementally for those who earn more than $150,000 in individual income. State taxation may also be different.
For small businesses functioning with limited HR and payroll services, it may be beneficial to outsource these payroll services to a trusted entity that is well-versed in helping businesses stay compliant with these latest changes and potential pain points.
This article is brought to you by Staffing Kansas City, a full-service employment agency specializing in executive placements, contract-to-hire, direct hire and temporary employment placement services.
