Income Tax Deduction for Federal Law Overtime Under One Big Beautiful Bill Act

The recently passed omnibus federal tax and spending cuts legislation contains a federal income tax deduction on the premium portion for weekly overtime hours under federal law.  The deduction is retroactive to January 1, 2025 for covered federal overtime premiums and will last for the 2025 through 2028 tax years.  Because the tax benefit is a deduction, income tax withholding will still occur on the in-scope federal overtime wages, but the employee will be able to apply for a refund with their income tax return.  The 2025 W-2 and future W-2s will contain a box reporting the deductible premium portion of federal overtime wages paid by the employer.  In-scope federal overtime premium wages will still be subject to FICA and FUTA payroll taxes.  The deduction only applies to the premium portion of federal weekly overtime (example, with $20 standard time and $30 overtime, only the $10 overtime premium portion) and, therefore, does not apply to daily overtime or double time nor other overtime premiums that are not required under federal law.