California employers might be surprised by some important nuances in the “No Tax on Overtime” rules that rolled out nationwide last year and may create especially challenging obligations for employers in the Golden State. The new federal tax rules are not only surrounded by misconceptions but also inherently more complicated when overtime is paid in a state like California that has OT requirements that go beyond what’s federally required. We’ll break it all down and give you the top employer takeaways.

Quick Overview

The One Big Beautiful Bill Act (OBBBA), which President Trump signed into law last year, includes a new federal income tax deduction related to overtime pay. This new rule (which applies for tax years 2025 through 2028):

• allows an eligible worker to take a deduction on their individual tax return of up to $12,500 (or $25,000 if married filing jointly) in “qualified overtime compensation” they received during the applicable tax year; and
• imposes new filing and information reporting requirements on employers related to such qualified overtime compensation (the IRS granted employers penalty relief for failures to comply with these new requirements, but the relief applies only for taxable year 2025).

Under the OBBBA, “qualified overtime compensation” means overtime compensation (excluding qualified tips) paid to an individual that:

• is required by federal law – specifically, under section 7 of the Fair Labor Standards Act (FLSA); and
• exceeds the individual’...

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