Client Advisory: IRS Guidance on Overtime Premium Under the OBBBA

IRS Guidance on Overtime Premium Under the OBBBA

On November 21, 2025, the Internal Revenue Service (IRS) released Guidance for Individual Taxpayers who received Qualified Tips or Qualified Overtime Compensation in 2025. This guidance addresses how employers and taxpayers should address Overtime Premium tax benefits under the One Big Beautiful Bill Act (OBBBA). Back in July, we provided clients with an overview of the workplace provisions of the Act and shared that the IRS would be issuing guidance as we approached the end of the year. While many clients will rely on the guidance or assistance of their payroll processing company, it is important to remember that the compliance obligation remains with the employer.

OBBBA Tax on Overtime

Under the OBBBA, beginning in tax year 2025 and continuing through 2028, employees may claim a new federal income-tax deduction for qualified overtime compensation, effectively exempting the premium portion of overtime pay from taxable income up to annual limits. The deduction applies only to the amount of overtime compensation above the employee’s regular rate of pay. For example, the additional 0.5× premium in time-and-a-half overtime or the premium component of double-time or other enhanced pay rates. Workers may deduct up to $12,500 per year ($25,000 for joint filers), and because Forms W-2 will not itemize the qualifying amount, employees must calculate the deductible portion using employer-provided pay records or another reasonable method as outlined in the IRS guidance. The guidance offers numerous examples to help employers and employees understand the excludable portion of overtime or premium pay.

Key Changes Under the Law & IRS Guidance

The OBBBA (effective for tax years 2025–2028) establishes a new federal income tax deduction for both Qualified Overtime Compensation and Qualified Tips. This advisory will only address the treatment of Qualified Overtime Compensation. Qualified Overtime Compensation is defined as:

“Qualified overtime compensation” — i.e., the premium portion of overtime pay required under the Fair Labor Standards Act (FLSA).
For qualified overtime: the deduction applies only to the portion of overtime pay that exceeds the regular rate (i.e., the “half-time” premium, not the entire overtime pay).
The deduction limit: up to $12,500 (single) / $25,000 (joint filer) per year.
The deduction is available to taxpayers regardless of whether they itemize or take the standard deduction.
Initially, we thought that the IRS would issue an updated Form W-2, which would separately itemize Qualified Overtime Compensation. However, the IRS has stated that the 2025 versions of W-2, 1099-NEC, 1099-MISC, and 1099-K will not reflect separate line-items for qualified overtime or tip. The IRS Guidance instructs workers how to determine their deduction when separate reporting is not provided.
Under the Guidance, employees receiving multiple pay rates (regular, overtime, double-time, premium, holiday shift, etc.) must use a "reasonable method" to calculate and substantiate the amount of Qualified Overtime Compensation. This can be done by employer-provided records, including pay stubs, separate wage statements, and/or hours worked.
It is important to note that the new tax rules do not change existing pay obligations under the FLSA or other labor laws. Employers must continue to pay overtime (or double-time or premium pay) per applicable law/contract. The tax deduction affects only the employee's individual income tax.

What This Means for EMS Agencies & Providers

Because EMS agencies often pay multiple rates (base pay, overtime, double-time, holiday premium, “special detail” pay, shift differentials, etc.), the new IRS rules may create administrative challenges for both employers and employees.

Pay components eligible for deduction - Only the portion of pay that represents the FLSA-mandated overtime premium (or a reasonable approximation thereof) may qualify for the new deduction. For example:

If an employee works overtime and is paid “time-and-a-half,” the “half-time” portion (i.e., the extra 0.5×) is potentially deductible.
If paid double-time (2× regular rate), or other premium rates (holiday pay, shift differential, hazard pay, etc.), the portion above regular rate may qualify but employer records must allow a reasonable calculation or approximation of that premium amount.
Pay in excess of the FLSA-required premium (e.g., voluntary premium pay, incentives, bonuses, hazard stipend, flat-rate “special detail” pay) might not qualify, depending on how the pay is classified and documented.
The IRS Guidance furnished several examples to help illustrate how to treat the exemption in various situations.

Example 1. Individual A has access to a payroll system that shows totals of amounts paid to Individual A in 2025, including the FLSA Overtime Premium paid during 2025. In 2025, Individual A is last paid wages on December 22, 2025, for the payroll period beginning on November 30, 2025, and ending on December 13, 2025.21. The payroll system shows $5,000 as the “overtime premium” that Individual A was paid during 2025. For purposes of determining the amount of qualified overtime compensation received in tax year 2025, Individual A may include $5,000 (the FLSA Overtime Premium).

Example 2. Assume the same facts as in example 1 except that Individual A’s pay stub shows a total “overtime” amount of $15,000 (which is the FLSA Overtime Premium combined with the portion of the individual’s regular wages for the hours worked over 40 in a workweek). For purposes of determining the amount of qualified overtime compensation received in tax year 2025, the individual may include $5,000 (the FLSA Overtime Premium, computed by dividing $15,000 by 3).

Example 3. Individual B’s employer has a practice of paying overtime at a rate of two times an employee’s regular rate of pay, and Individual B was paid $20,000 in overtime pay under that practice, although 29 USC § 207 only requires Individual B’s employer to pay at one and one-half times the employee’s regular rate. Individual B’s last pay stub for 2025 shows “overtime premium” of $10,000 paid in 2025 (which is Individual B’s overtime premium paid at a rate of two times the individual’s regular rate). For purposes of determining the amount of qualified overtime compensation received in tax year 2025, Individual B may include $5,000 ($10,000 divided by 2).

Example 4. Assume the same facts as in example 3 except that Individual B’s pay stub shows a total “overtime” amount of $20,000 (which is Individual B’s overtime premium paid at a rate of two times the individual’s regular rate of pay, combined with the portion of the individual’s regular wages for the hours worked over 40 in a workweek). For purposes of determining the amount of qualified overtime compensation received in tax year 2025, Individual B may include $5,000 (the FLSA Overtime Premium, computed by dividing $20,000 by 4).

Example 5. Individual C works in law enforcement and is paid $15,000 of total annual overtime pay on a “work period” basis of 14 days that complies with section 207(k) of the FLSA.22 For purposes of determining the amount of qualified overtime compensation received in tax year 2025, Individual C may include $5,000 ($15,000 divided by 3).

Example 6. Individual D works for a State or local government agency that gives compensatory time at a rate of one and one-half hours for each overtime hour worked under 29 USC 207(o). In 2025, Individual D was paid wages of $4,500 with respect to compensatory time off taken in accordance with section 207(o). For purposes of determining the amount of qualified overtime compensation received in tax year 2025, Individual D may include $1,500, one-third of these wages for purposes of determining qualified overtime compensation under section 225(c).

Recordkeeping & payroll-reporting obligations - Because standard forms (W-2, 1099) will not separately show qualified overtime or premium pay for 2025, employers should consider:

Maintaining detailed internal pay records (pay stubs, breakdowns by pay rate, hours worked per rate, pay-rate history).
If feasible, issuing supplemental statements or pay-detail reports to employees that separate regular wages from premium/overtime/other rate pay to facilitate employees’ ability to claim deductions.

Communication with personnel — EMS leadership and HR should proactively inform employees about this change. Despite the initial media frenzy surrounding these OBBBA provisions, many EMS staff may not realize the new deduction exists. Providing guidance may help staff maximize tax benefits.
Policy review for pay-rate structures — For agencies with frequent shift-differentials, double-time, or premium pay (holiday, on-call, stand-by, hazard, etc.), payroll and compensation policies should be reviewed to assess how much of those payments might be eligible as “qualified overtime compensation.”

Advisory / Action Items for EMS Employers

Review current payroll and pay-rate practices to identify which components might constitute “qualified overtime compensation” under the guidance.
Enhance record-keeping — ensure pay stubs, timecards, and payroll ledgers clearly distinguish regular wages from overtime, double-time, premium, shift-differential, holiday pay, and other special pay.
Consider issuing supplemental statements or breakdowns for 2025 to help employees document qualified pay for tax-deduction purposes. It is possible that the IRS will issue a modified Form W-2 in future tax years. However, getting a practice in place is recommended.
Inform and educate staff (via bulletin, memo, pay-period communication) that the new deduction is available, but only certain pay components qualify - and that proper documentation will be important when filing their 2025 tax return.
Coordinate with payroll vendors / payroll software providers to assess whether system modifications are needed, or whether manual processes should be implemented for 2025.
Consult legal or tax counsel / compliance advisor if your agency’s pay practices involve non-standard rates (double-time, flat-rate premiums, shift differentials, or government-agency exemptions under the FLSA) to evaluate whether those pay components qualify as “qualified overtime compensation” under the guidance.

As always, we will provide support and resources to clients who have questions or need assistance with these changes. Be sure to email questions@wmklawgroup.com if you need assistance.