How Do Trump Accounts (Section 530A) Work, and Who’s Eligible to Contribute?
The One Big Beautiful Bill Act created a temporary federal deduction for certain overtime earnings beginning in 2025.
Understanding what counts as qualified overtime compensation is important because the deduction applies to only part of an employee’s overtime pay, not the entire amount.
The One Big Beautiful Bill Act, Public Law 119-21, signed July 4, 2025, created a federal income tax deduction for certain overtime earned from 2025 through 2028. Before the law, overtime wages generally received no special federal income tax deduction. Under the new rules, eligible workers can deduct the qualifying portion of overtime pay, subject to annual limits and income phase-outs. Importantly, the OBBBA tax changes do not make overtime wages tax-free. Overtime remains subject to federal income tax withholding and Social Security and Medicare taxes. The deduction instead reduces the amount of income ultimately subject to federal income tax.
The deduction applies to the overtime premium required under Section 7 of the Fair Labor Standards Act. For conventional FLSA overtime pay at time-and-a-half, that generally means only the extra 50% premium, not the employee’s entire overtime wage. For example, an employee earning $20 per hour who receives $30 for an overtime hour generally has $10 of qualifying compensation. Overtime paid solely because of state law, a collective bargaining agreement or company policy does not qualify unless the FLSA also requires it. Extra double-time premiums, payments to FLSA-exempt employees and weekend or holiday premiums not required by the FLSA are also excluded.
Eligible taxpayers can claim the overtime tax deduction whether they itemize or take the standard deduction, provided the worker receiving the overtime has a Social Security number valid for employment. The annual deduction is limited to $12,500 for an individual return or $25,000 for married couples filing jointly. Married taxpayers must file jointly. The deduction begins phasing out when modified adjusted gross income exceeds $150,000 for individual filers or $300,000 for joint filers. It decreases by $100 for every $1,000 above those thresholds, effectively eliminating the maximum deduction at $275,000 of MAGI for an individual and $550,000 for joint filers.
Employers need payroll systems capable of identifying the FLSA-required overtime premium separately from regular wages and other premium pay. IRS Notice 2025-62 provided transition relief for 2025, so employers were not penalized for failing to separately report the amount that year. Beginning with tax year 2026, employers must report qualified overtime on Form W-2, Box 12, using Code TT. Payroll teams should also verify regular-rate calculations and maintain supporting records. Overtime remains subject to normal employment taxes and withholding. If an employer discovers an error in the Code TT amount, current IRS guidance requires correction through Form W-2c.
The deduction applies only for tax years 2025 through 2028, making it a four-year planning consideration rather than a permanent change. Employees should review year-end reporting, remember that only the qualifying overtime premium is deductible and consider whether an updated Form W-4 is appropriate for their withholding. Employers should reconcile timekeeping, payroll codes, regular-rate calculations and W-2 reporting before year-end instead of reconstructing overtime amounts later. State income tax treatment should also be reviewed because individual states may not conform to the federal provision. The deduction does not change unrelated business-level state obligations, including State Gross Receipts Taxes, or existing federal payroll tax requirements.
For more than four decades, Bennett Thrasher has provided businesses and individuals with strategic business guidance and solutions through professional tax, audit, advisory, and business process outsourcing services. Contact Cory Bennett, partner in Bennett Thrasher’s Hospitality practice, or call us at 770.396.2200.
Back to Q&A
Never miss an update. Sign up to receive our monthly newsletter to unlock our experts' insights.
Subscribe Now