As a business owner, one area we often overlook is our own salary. Many of us simply “set it and forget it,” grateful that we don’t have to clock in and out every day — especially with all the other responsibilities competing for our attention.
With the passage of the OBBBA, overtime wages may now qualify for a federal tax exemption. While this is a welcome opportunity, there are several key rules and limitations to be aware of.
Overtime Exemption Reporting
When the tax break applies: Overtime wages won’t reduce your taxes in the paycheck you receive today. Instead, your total qualifying overtime will be reported on your year-end W-2. You can then deduct this amount from your taxable income.
Annual cap: The deduction is limited to $12,500 per worker per year. Married couples filing jointly may deduct up to $25,000 combined.
Employer requirements: Employers must pay at least time-and-a-half (or more) for overtime hours. If salaried employees regularly work 50+ hours a week with no increase in pay, they cannot deduct the “extra” hours since no overtime premium is being paid
IRS Publication on Overtime Wages
Department of Labor Overtime Rules
Overtime Exemption Calculation
There has been some confusion about what’s actually exempt. It’s not the entire overtime wage that qualifies — only the additional overtime premium.
Example 1: An employee earning $20/hour regular pay who works overtime at time-and-a-half ($30/hour) can deduct only the $10 premium, not the full $30 wage.
Example 2: If paid double time ($40/hour), only the extra $20/hour above the regular wage is deductible.
Employers should ensure that their payroll provider tracks this correctly.
Overtime Exemption Limits
Like most tax laws, there are additional restrictions:
Income phaseout: If your Modified Adjusted Gross Income (MAGI) exceeds $150,000 (single filers) or $300,000 (married filing jointly), your deduction will begin to phase out. For every $1,000 over the limit, you lose $100 of the deduction.
State rules vary: For example, in Indiana, this federal exemption does not currently apply, meaning you’ll still pay full state income tax on all overtime wages.
W-2 employees only: Independent contractors are not eligible. However, if they operate as an S-corporation or other entity and pay themselves wages, they may qualify through that structure.
Why Plan Ahead?
Proactive tax planning can help you maximize the benefit of this new exemption. Waiting until January means you’ve missed opportunities to reduce your tax burden for 2025. But planning today sets you up for success in 2026 and beyond.
If you have questions about how this law impacts your business or employees, we’re here to help.
Contact us today to discuss how we can help you take full advantage of the overtime exemption.
