The “no tax on overtime” provisions are included in Section 70202 of the One Big Beautiful Bill Act (OBBB), which was signed into law on July 4, 2025. These provisions have generated considerable confusion among employers and employees. This blog explores how these new provisions impact Washington State employers and their employees.
This new law allows non-exempt hourly employees under the Fair Labor Standards Act (FLSA) to take a federal income tax deduction for the total amount of “qualified overtime compensation” received. Eligible employees can claim the deduction on their federal tax returns starting with the tax year 2025 through 2028.
Qualified overtime compensation applies to the portion of overtime pay that is a bonus or premium over regular wages under FLSA. When an employee receives FLSA overtime compensation for hours worked over 40 hours in a week—also known as “time-and-a-half” pay—the deduction only applies to the “and-a-half” portion. For example, if an employee regularly makes $20 an hour and $30 an hour for overtime, only the $10 per hour premium for overtime is eligible for the new tax deduction.
Section 7 of FLSA includes an option for alternative work periods from the standard 40-hour work week for employees engaged in fire protection or law enforcement. As a result, FLSA “overtime” may be calculated differently for those employees.
The OBBB has a maximum deduction of $12,500 of qualified overtime compensation per employee ($25,000 if married filing...
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