B&J Bookkeeping & Taxes has brought you all the latest on the newest laws, tax changes, and how it affects you. One such area is in payroll and payroll services – including your overtime. Below we will show you how the OBBB affects your payroll and overtime.

1. What is No Taxes on Overtime?

The new bill for 2026 – 2028 affects everything from child tax credits to taxes on social security payments. One benefit of the bill is the new “no tax on overtime pay.” It goes into affect this year and will be part of your tax preparation in 2027. It allows typical workers to deduct a portion of their overtime pay. This refers to the time and a half for hours worked over 40 and possibly for weekends and holiday work. You can deduct up $12,500 if you are a single filer or up to $25,000 if you are married filing jointly.

Did you know? Approximately, 4.3 million Americans will be eligible for overtime and may be eligible for the tax deduction. Source: Kries Enderle

2. How the New Overtime Deduction Affects Payroll Services

Overtime pay should be reported on a worker’s W-2 in Box 12. This will allow all eligible taxpayers to claim the deduction on Schedule 1-A of Form 1040 even if they choose not to itemize. With the promise of no taxes, your workers will most likely be keeping a close eye on their overtime hours. Make sure everything matches before you report these numbers to the IRS.

3. How to Confuse the Overtime Deduction

This can be confusing to many business owners, and even newly formed payroll services company. Some don’t realize that some of the below may not qualify for the overtime premium such as:

  • Regular hourly wages paid in addition to overtime.
  • Commissions or bonuses – even if paid during overtime.
  • Shift differentials.
  • and many others.

Did you know? Only 15% of workers who make a salary are eligible for overtime? This is in decline from 60% reported back in 1975. Source: Speak Wise App

4. How Payroll Services Can Help Navigate

Unfortunately, this tax deduction isn’t as simple as it sounds. For example, most salaried employees may not qualify for it – even if they want to. The deduction becomes more complicated if a worker has one or more job roles and works overtime on all of them. The deduction is only for federal income tax and does not apply to FICA or state and local taxes. We recommend you help keep your workers expectations real by showing them a tool like this No Tax on Overtime Calculator.

Payroll and Overtime Services in Houston

We urge you to contact a bookkeeper, tax professional, or payroll services expert to help you make the most of the OBBB. This includes any overtime, tips, or other income that qualifies for tax free status. Contact us to set up an appointment to help you straighten everything out.