Public employers will turn to the new federal overtime tax deductions provided under the One Big Beautiful Bill Act (“OBBBA”), as the end of Tax Year (“TY”) 2025 approaches. The OBBBA introduced a significant new tax deduction for employees who receive overtime required by federal law, aimed at lowering taxable income for employees. The bill went into effect earlier this year with retroactive application to January 1, 2025; it will remain in place through December 31, 2028 (unless extended).
Public employers should not only consider the impact of this new tax deduction on how they prepare W-2 forms for employees for TY 2025, but how they should adapt or modify payroll practices to align with the OBBBA’s provisions. This alert summarizes how the OBBBA intersects with existing federal wage and hour law, and how public employers should evaluate their compliance efforts.
Overview of FLSA Requirements
The OBBBA allows employees to claim a new tax deduction for “overtime compensation… required under Section 7 of the Fair Labor Standards Act.” (26 USC § 225(c)(1).) Thus, in order to appreciate the scope of this new tax deduction, public employers must ensure they are familiar with what qualifies as overtime required by the FLSA.
Section 7 of the FLSA contains specific and limited overtime requirements. The general rule is that employers must compensate non-exempt employees who work more than 40 hours in a 7-day workweek at a rate of 1.5 times their regular rate. (29 USC §...
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