The One Big Beautiful Bill Act is sparking questions from employees and payroll departments about how to handle the various tax breaks, including on overtime pay.
The Internal Revenue Service’s announcement Thursday saying it would not be making any changes for the rest of tax year 2025 to withholding tables or to information returns such as the Forms W-2, 1099 and 941 until next year may help overworked payroll departments for now, while also boosting tax savings next year ahead of the midterm elections for many taxpayers. But employees still want to know about the various tax breaks.
“We’re definitely hearing a lot of rumbling on the overtime,” said Tasha Clark, a payroll manager at Armanino, a Top 25 Firm based in San Ramon, California. “It’s understanding the implications of this overtime rule. With the headline, it sounds like I get to work all this overtime, and I’m going to have an automatic increase in my pay each pay period because I’m not going to be taxed on it. But when you start getting into the details, that’s not exactly what’s going to happen. They’re going to get that tax deduction at the end of the year when they file their personal taxes, so it’s not going to be an immediate impact. I also think there’s a misunderstanding that this is truly only for federal taxes, and it’s only for the overtime premium that they’re going to get that deduction on, up to that certain limit, so there’s a lot more constraints than the headline gives.”
The IRS has provided little guidance so far, with a page on its website devoted to some of the provisions of the OBBBA, including overtime, saying, “Effective for 2025 through 2028, individuals who receive qualified overtime compensation may deduct the pay that exceeds their regular rate of pay (such as the ‘half’ portion of ‘time-and-a-half’ compensation) that is required by the Fair Labor Standards Act (FLSA) and reported on a Form W-2, Form 1099, or other specified statement furnished to the individual.”
The maximum annual deduction is $12,500 (or $25,000 for joint filers), and the deduction phases out for taxpayers with modified adjusted gross income over $150,000 (or $300,000 for joint filers), the IRS noted.
But taxpayers are awaiting further guidance. “It is definitely a payroll situation, but I think it also starts turning into an HR thing,” Clark said. “We’ve had multiple clients already reach out and say they have employees that are now saying, ‘I want to be non-exempt now because I want to be paid overtime so I can have this tax break.’ And that’s not exactly just an automatic change. Employees can’t decide to be non-exempt. There’s very specific rulings. It’s by position, and I don’t think employees understand if they go non-exempt from exempt, that does change their job description, their job duties, how they report time, how they report just everything really in general. So it’s probably not in their best interest to change just for the overtime piece, but it’s really having those conversations with the employees so they understand.”
The impact on state taxes is unclear right now. “The overtime ruling is definitely specific to federal only,” said Clark. “Now there’s a big question, if the states are going to follow, and what states are going to do something completely different? There’s just so much up in the air as to how this is all going to play out.”
The new tax law also expands access to health savings accounts for employees who are covered under a “direct primary care arrangement” as long as their monthly fees are under $150 for single people or $300 for families.
“This is going to open up a lot more employees to have access to an HSA.” said Clark. “Big picture, I think it will be a good benefit for the employees. It’s just going to add some more administrative work for the employers.”
Employees who are receiving Medicaid will have to deal with the expanded work requirements, and so will their employers.
“Anytime there’s a lot of changes such as this, it worries employers,” said Clark. “From a compliance and reporting perspective, what additional things are they going to have to track? It all just adds a layer of burden on the employer. There’s definitely some anxiety right now because there’s just not a lot of information yet, so there’s a lot of speculation and guessing on how this is all going to work and impact them.”
