Extra Hours, Extra Savings: The Newest Perk of Overtime Pay

By Sarah Motiff, Converge Great Lakes Accountant

Signed into law on July 4, President Donald Trump’s One Big Beautiful Bill Act has temporarily reshaped the tax landscape for millions of workers. One of the provisions is no federal income tax on overtime pay.

Starting with the 2025 tax year, workers will be able to deduct up to $12,500 in overtime pay from their taxable income—or $25,000 for joint filers. The overtime provision introduces a major shift for payroll in 2025—but it’s more about tax reporting than paycheck changes.

Timeline & Limits

• Effective Date: Taxable years beginning after December 31, 2024

• Expiration: Provision ends December 31, 2028

• Income Cap: Deduction phases out for individuals earning over $150,000 and couples earning over $300,000

What Do Employers Need to Know?

• No change to gross pay: Employers still calculate and pay overtime as usual—typically time-and-a-half for hours over 40 per week.

• Federal income tax is still withheld: Employers continue withholding federal income tax from overtime wages throughout 2025. The tax break kicks in when employees file their tax return the following year. 

• Payroll software updates: Starting in 2026, employers will need to report overtime premium pay separately on Forms W-2. For 2025, they can use any “reasonable method” to estimate qualifying amounts.

• No change to FICA/Medicare: Social Security and Medicare taxes still apply to overtime wages. The exemption is strictly for federal income tax.

What Do Employees Need to Know? 

• Deduction at tax time: Workers can deduct up to $12,500 in overtime pay from their taxable income ($25,000 for joint filers).

• Deduction calculations: Only the .05x of overtime is used towards the calculation towards the  tax deduction.

• Refund potential: This could result in larger tax refunds or lower tax bills, especially for middle-income earners who log significant overtime.

• No immediate paycheck boost: Since withholding continues, the benefit is delayed until tax filing.

Compliance Tips for Churches:

Customize Payroll Settings

• Track Overtime Premium Separately: Whether you use QuickBooks Online or a different payroll program you should set up a separate “Overtime Premium” item to isolate the extra 0.5x pay above regular wages.

• Label for Reporting: Use clear naming conventions like “OT Premium – BBB Deductible” to simplify future W-2 reporting.

Review Employee Classifications

• Ensure employees are correctly classified as non-exempt under FLSA, since only FLSA-defined overtime qualifies for the deduction.

Prepare for W-2 Adjustments

• The IRS will require separate reporting of deductible overtime starting with 2025 W-2s filed in 2026.

• Watch for accounting software patches that support this new reporting format.

Educate Your Team

• Let employees know that taxes will still be withheld from overtime pay, but they can deduct up to $12,500 ($25,000 for joint filers) when filing their 2025 return.

• For those churches who utilize the CGL payroll service, we will add a note to your next payroll statement for you to send to your employees. 

Summary

While there will be no immediate changes to how churches deduct withholding taxes, they will need to adjust payroll processes to report overtime pay separately starting in 2026. This new legislation aims to provide potential tax refunds or reduced tax bills for many workers, particularly those who earn overtime, though the benefits will be realized only during tax filing. Churches are encouraged to take proactive steps to ensure compliance and effectively communicate these changes to their staff.