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Fact check: What are the overtime pay requirements in the big beautiful bill?
Executive Summary
The One Big Beautiful Bill Act (OBBBA) creates a new personal-tax deduction for qualified overtime compensation, defined as overtime pay mandated by the Fair Labor Standards Act (FLSA) that exceeds an employee’s regular rate, with a statutory deduction cap reported at $12,500 and linked specifically to overtime paid under FLSA §7 [1] [2]. Parallel regulatory changes from the Department of Labor (DOL) raise the salary thresholds that determine white-collar overtime exemptions, which reshapes who will actually receive overtime and therefore who can potentially claim the OBBBA deduction [3] [4].
1. Why the deduction matters — a tax offset tied to overtime, not wages
The OBBBA’s tax provision is narrowly targeted: it allows individuals to deduct only “qualified overtime compensation” from personal returns, which the bill defines as overtime paid under FLSA §7 in excess of the regular rate, not ordinary wages or bonuses [1] [2]. The legislation also reportedly caps the deduction at $12,500, thereby limiting the fiscal benefit to workers who earn substantial overtime but preventing unlimited tax sheltering of overtime income [2]. This design makes the measure a focused subsidy for overtime earners, not a broad-based wage tax break, and it creates administrative questions for payroll reporting and tax compliance tied to FLSA classifications [1].
2. DOL salary-threshold changes reshape eligibility for overtime and the deduction
The Department of Labor’s final rule incrementally raises the minimum salary levels for white-collar exemptions, first effective July 1, 2024 and again January 1, 2025, moving standard thresholds to $844 per week and later $1,128 per week, and other proposed thresholds aimed as high as an annual $55,068 have been discussed [3] [5]. These regulatory shifts increase the pool of workers eligible for overtime pay under the FLSA, which simultaneously expands the population who could potentially claim the OBBBA deduction because the deduction tracks overtime paid under FLSA §7 [3] [4]. Employers and tax preparers must therefore monitor evolving DOL thresholds to determine who qualifies both for overtime pay and the new tax deduction [3].
3. Conflicting enforcement incentives for employers and payroll reporting headaches
Because the OBBBA deduction hinges on overtime paid under the FLSA, employers face competing incentives: stricter adherence to FLSA overtime payments increases workers’ taxable overtime that can be deducted, while failing to reclassify white-collar employees as non-exempt may remove overtime obligations but expose employers to DOL enforcement risk [1] [4]. The law’s reliance on FLSA definitions creates administrative friction for payroll systems and tax reporting; employers must track overtime separately from regular wages to support employee claims and tax filings, and auditors will need to reconcile payroll records with individual deductions [1] [2]. These compliance burdens may prompt increased consultation with employment and tax counsel.
4. Who gains and who is left out — the distributional implications
The OBBBA’s combination of a deduction cap and an overtime-only definition means benefits will concentrate among workers who both earn regular hours that qualify for FLSA overtime and accumulate substantial overtime pay, rather than among salaried employees exempted by white-collar rules or workers whose additional pay comes as bonuses or non-overtime premiums [2] [1]. With DOL threshold increases bringing more workers under FLSA overtime protections, gains could broaden, but the practical effect depends on employers’ classification choices and whether overtime is actually paid [3] [4]. Low-hour part-time workers and those in exempt roles remain largely outside the deduction’s reach.
5. Policy trade-offs and fiscal impacts policymakers omitted
The bill’s architects framed the deduction as worker-friendly, but the measure trades direct wage mandates for a tax-based subsidy that is capped and administratively complex, potentially reducing its immediate stimulative effect and introducing enforcement costs [2]. The legislative approach offloads much of the eligibility determination to existing FLSA frameworks and DOL rulemaking, which means fiscal and distributional outcomes depend heavily on regulatory timing and employer behavior—factors not fully addressed in legislative text or contemporaneous summaries [1] [5]. The cap at $12,500 limits potential revenue loss, but shifts compliance burdens to employers and tax authorities.
6. Divergent perspectives: labor advocates vs. employers and regulators
Labor advocates emphasize that linking the deduction to FLSA overtime rewards paid extra hours and could encourage proper overtime payments, while employer groups warn that the measure creates new payroll and tax complexity without resolving classification disputes that drive overtime litigation [2] [1]. Regulators, including the DOL, have focused on salary-threshold adjustments as the primary lever to expand overtime coverage; their rulemaking effectively determines how many workers can benefit from the OBBBA deduction, highlighting a policy interplay between legislative tax incentives and administrative labor regulation [3].
7. Bottom line and what to watch next
The OBBBA’s overtime deduction is a targeted, capped tax benefit tied expressly to FLSA §7 overtime pay, creating conditional relief for overtime earners but relying on DOL rulemaking to determine who qualifies in practice [1] [2] [3]. Stakeholders should monitor DOL threshold finalizations, employer classification practices, and forthcoming IRS guidance on claiming the deduction and verifying qualified overtime, because these administrative developments will shape the law’s real-world reach and compliance burden [3] [4] [5].