Within the One Big Beautiful Bill Act, signed into law on July 4, 2025, is the new “No Tax on Overtime” rule that may positively impact many hourly workers as it relates to their payment of federal taxes starting in 2025. However, this change in the law also presents new challenges for employers and ambiguities that will need to be addressed.

For starters, the new overtime provision is limited to overtime wages paid by employers to employees qualifying for Section 7 overtime under the Fair Labor Standards Act of 1938 (FLSA). The provision does not apply to exempt employees as exempt employees do not qualify for FLSA overtime. The provision allows certain eligible employees to take a deduction for overtime wages earned pursuant to the FLSA and reported on Form W-2. Overtime applies to the overtime gained under the FLSA. It does not apply to overtime gained by other means such as overtime earned by employer policy or by provisions of a collective bargaining agreement.

Since the provision applies to overtime earned under Section 7 of the FLSA, it appears to apply to one aspect of public-sector compensatory time earned under 29 C.F.R. Section 553.22–.27, since that compensatory time is based on hours worked above the overtime threshold and thus gained under Section 7. We do not believe this law applies to 29 C.F.R. Section 553.28 “other compensatory time,” which is time earned and accrued by an employee for employment in excess of a non-statutory (that is, non-FLSA)...

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