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What the “No Tax on Overtime” Rule Does
Federal income tax will no longer apply to the overtime premium portion of certain qualifying overtime wages.
This change is retroactive to January 1, 2025, and is scheduled to remain in effect through 2028.
Defining “Qualified FLSA Overtime”
To benefit from this deduction, the overtime must meet the standards set by the Fair Labor Standards Act (FLSA).
For household employment, this only applies when:
- The employee is a live-out employee.
- The employee works over 40 hours in a 7-day workweek.
If your live-out nanny works 45 hours, the extra 5 hours qualify as FLSA overtime. The overtime premium (the extra ‘half’ pay of their ‘time-and-a-half’ rate) for those 5 hours is now federally tax-deductible.
What Overtime is NOT Eligible?
Some forms of overtime commonly paid in household employment do not qualify for this new federal tax break.
These ineligible wages include:
- Live-In Overtime: Overtime paid to employees who live in your home, even if required by state law.
- Daily Overtime: Premiums required under certain state law for working more than 8 hours in a day.
- Enhanced Premiums: Double time, holiday pay premiums, or guaranteed overtime hours that are not directly tied to FLSA-mandated hours.
An employee cannot claim the federal tax deduction on these premium payments.
How This Impacts Your Household Employee
Employees can deduct the federal overtime premium from their gross income, reducing their tax liability.
- Deduction Limits: An employee can deduct up to $12,500 (for individuals) or $25,000 (for joint filers).
- Claiming the Benefit: The deduction will be claimed when the employee files their personal tax return (starting with tax year 2025).
- Taxes Unaffected: This deduction does not impact Social Security, Medicare, or state income taxes.
Employees who expect to earn substantial qualified overtime may want to adjust their tax withholdings now to account for a larger expected deduction when they file.
New Requirement as a Household Employer
The core payment process remains unchanged, but you now have a new documentation duty to fulfill so your employee can claim the benefit.
For 2025 Earnings
You must provide your employee with a written statement showing the total amount of FLSA overtime premiums paid during the year. You must also report this total amount to the IRS. In the coming months, the IRS will provide additional information explaining the process for 2025.
Starting in 2026
This amount will likely be reported in a new, dedicated box on Form W-2, similar to how other tax-exempt benefits are currently documented.
Tax and legal updates or any other information provided by GTM Payroll Services Inc. is not intended to be exhaustive, nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice.
