Overtime Just Got a Tax Break

While this benefit directly affects your employees, it also has key implications for your business, especially around payroll, compliance, and employee communications. This guide breaks it down: how the new deduction works, who’s eligible, and what your business needs to consider heading into tax season.

What’s New and Why It Matters to Your Business

Under a new federal measure, employees earning under $150,000 annually (or $300,000 for joint filers) can now deduct eligible overtime pay from their taxable income. The deduction maxes out at $12,500 per individual or $25,000 per couple.

Here’s what this might look like in your workforce:

• Maria, a retail supervisor, worked 12 extra hours per week during peak season, earning an extra $10,000. With the new deduction, she could save around $2,400 in federal taxes—making your overtime incentives more attractive without added cost to you.
• Chris, an IT contractor with annual earnings of $155,000 including $8,000 in overtime, doesn’t qualify—and it's important your HR or payroll teams understand the income thresholds to help employees avoid confusion.
• Erin and James, both healthcare professionals employed by your company, earned a combined $285,000 with $22,000 in overtime. They qualify for the full deduction, potentially saving over $5,000 in taxes—which could be a strong retention point.

This policy aims to support employees in high-demand sectors like healthcare, retail, logistics, and manufacturing—industries where SMBs often rely heavily on overtime during peak periods.

Why It Matters for SMB Employers

• Employees may seek clarification from you regarding eligibility.
• It is crucial to ensure your payroll systems accurately track and report overtime earnings separately, as this information will be vital for your employees when they claim this deduction on their tax returns.
• This benefit could help boost morale and retention in roles where overtime is expected.

How Employees Claim the Deduction

Employees will claim this deduction when filing their federal income taxes, typically on Form Schedule 1 (Form 1040).

Questions SMBs Should be Asking to Stay Compliant and Support Employees

Even though the deduction applies to employee taxes, as an SMB you play a vital role in ensuring the accuracy and transparency of payroll records. Here are key questions to guide your next steps:

• Are my payroll records overtime-compliant?
• Can my HR/payroll teams answer questions on eligibility?
• Am I proactively tracking overtime earnings?
• Should I adjust my employee communication strategy?

What You Can Do Next

Once you’ve asked the right questions, here’s how to move forward with confidence:

• Ensure that all overtime is properly documented on employee pay stubs, W-2s, or 1099s if applicable. If you outsource payroll, verify your provider is up to speed on the new deduction.
• Train your HR or payroll staff to understand the income thresholds and deduction caps, so they can guide employees—or at least direct them to a qualified tax professional.
• It may be time to revisit how overtime is tracked in your systems. Clear records will help employees claim deductions without unnecessary complications.
• Consider updating internal communications—especially during high-overtime periods—to inform employees about the potential tax savings and how it affects their pay.
• Note that this is a federal tax deduction; businesses should also be aware of any corresponding state tax implications, or advise employees to check their state's tax laws.

While the overtime deduction is designed to benefit individual taxpayers, SMBs must understand its ripple effect across payroll operations, HR support, and employee satisfaction. By staying informed and keeping your records airtight, you not only stay compliant—you also enhance your value proposition as an employer during a time when every dollar counts.

Have questions about how to align your payroll with the new deduction? Connect with a Legal Pro to ensure your business is prepared.