Long Hours Pay Off ... and Get a Tax Break!

On a blustery day – December 17 of 1903 to be exact -  on a sand dune in Kill Devil Hills, two brothers from Ohio achieved the first controlled powered flight.  This event was the culmination of years of planning, experimenting, and plain hard work.  Visitors to the Wright Brothers National Memorial can follow the brothers’ work from their bicycle shop in Dayton to that fateful day on the Outer Banks, see replicas of the Wright flyer and their shop and living quarters, plus walk the grounds where the first few flight distances are marked.  Of course, the highlight of any visit to the Memorial is a hike up the hill to the Wright Brothers Monument.

We can only imagine the long hours of work by Orville and Wilber and their employees to make the dream of flight come true.  If they were working today, their employees would most likely be covered by the Fair Labor Standards Act (FLSA) and would be mandated overtime pay along with other benefits.  And with the passage of OBBBA, they would be able to deduct that overtime pay.  Obviously, they can’t benefit from this new tax law, but many employees today can. 

Here’s a look at how the new “No Tax on Overtime” rule works:

First, only employees who are covered by the FLSA’s overtime laws are eligible for this deduction, and only the federally mandated “time and a half” overtime pay is covered.  Anyone working for an employer who provides double-time pay, holiday pay, or other non-mandated bonus pay does not get to deduct those extra amounts.

Only the “extra” portion of overtime pay is deductible.  For example, if a worker covered by FLSA regularly earns $20 an hour and is paid $30 an hour overtime, they are only allowed to deduct the $10 of overtime premium, not the $20 of base pay.

The maximum amount of qualifying overtime pay that may be deducted is $12,500 for a single filer, $25,000 on a joint return.  Married taxpayers who choose to file Married Filing Separate are not eligible for this deduction.  The deduction begins to phase out when Adjusted Gross Income exceeds $150,000 on a single return and $300,000 on a joint return.

The deduction is for federal income tax only.  All pay, including overtime, is subject to FICA taxes.  States may choose not to comply with this federal law and continue to tax all wages instead.  As of the time of this post, North Carolina has not stated definitively if it will comply or not.

Although OBBBA was passed last summer, this provision was made retroactive to January 1, 2025.  Employers will have new reporting requirements for 2026, but the late adoption of the new law caused the IRS to grant some leeway in reporting 2025 qualifying overtime.  Many employers are choosing to report qualifying overtime in box 14 of the employees’ W2.  Some may issue a year-end earnings statement that breaks out overtime.  Some employees will need to rely upon their paystubs to get the necessary information.  Bring any of these forms that are available when you drop off your tax documents to insure we have all the information we need.

No Tax on Overtime will be a great benefit for lots of taxpayers … let’s make sure anyone who qualifies for it is able to correctly claim it, just as we Tarheels correctly claim that we are First in Flight!

Image of the Wright Brothers Memorial