Starting in 2025, the overtime premium paid to hourly workers for hours over 40 per week is deductible from federal taxable income. For Frederick County contractors, tradespeople, healthcare workers, and manufacturers who regularly work overtime, this is meaningful take-home pay improvement. But there are important limitations — and Maryland has not conformed.
The One Big Beautiful Bill Act created a new above-the-line federal deduction for the overtime premium received by eligible employees. For tax years 2025 through 2028, workers who receive overtime pay under the Fair Labor Standards Act (FLSA) can deduct the overtime premium portion of their pay from federal taxable income.
This is the first time in modern tax history that overtime pay has received preferential federal tax treatment. The deduction is above-the-line — available to taxpayers who take the standard deduction as well as those who itemize. For a complete overview of OBBBA changes, see our full OBBBA guide.
This is a critical distinction that many workers misunderstand. The deduction applies to the overtime premium — not the entire overtime paycheck.
Under the FLSA, employees who work more than 40 hours in a workweek must be paid at least 1.5 times their regular rate for each overtime hour. The overtime premium is the extra 0.5 times — the additional 50% above the regular rate. The base regular rate pay for those overtime hours is not deductible.
A worker earns $30/hour regular rate and works 10 hours of overtime in a week. Overtime pay = 10 hours × $45 = $450 total. The overtime premium = 10 hours × $15 (the extra 0.5×) = $150. Only the $150 premium is deductible — not the full $450 overtime paycheck.
The deduction applies to employees who receive overtime pay under the FLSA. Key eligibility requirements:
Many Frederick County professionals — managers, administrators, engineers, accountants — are classified as FLSA-exempt salaried employees. If you do not receive time-and-a-half for overtime hours because you are exempt, you do not qualify for this deduction. The deduction is specifically for non-exempt hourly workers covered by FLSA overtime requirements.
The savings depend on the worker's hourly rate, overtime hours worked, and federal tax bracket. Here are examples for Frederick County workers in trades and healthcare:
| Scenario | Annual OT Premium | Federal Bracket | Federal Tax Saved |
|---|---|---|---|
| Electrician, $35/hr, 5 hrs OT/week | ~$4,550 | 22% | ~$1,001 |
| Nurse, $45/hr, 8 hrs OT/week | ~$9,360 | 22% | ~$2,059 |
| Contractor, $50/hr, 10 hrs OT/week | ~$13,000 | 22% | ~$2,860 |
| Manufacturing worker, $25/hr, 6 hrs OT/week | ~$3,900 | 12% | ~$468 |
As with the no-tax-on-tips provision, Maryland has not conformed to the federal overtime deduction. Overtime premium income that is deductible from federal taxable income remains fully taxable on your Maryland income tax return.
A Frederick County electrician who deducts $4,550 in overtime premium on their federal return saves approximately $1,001 in federal income tax — but still owes Maryland and Frederick County income tax on the full amount of their wages including the overtime premium. At the combined 8.75% Maryland rate, that's approximately $398 in Maryland tax on the deducted overtime premium that is not reduced by the federal provision.
For a full breakdown of where Maryland and federal tax law diverge, see our article on Maryland vs federal tax differences.
The overtime deduction creates important payroll and compliance considerations for employers with hourly workers who regularly work overtime:
The IRS is expected to require employers to separately report overtime premium pay on employee W-2s so the deduction can be properly calculated and claimed. As of the time of publication, the IRS had not finalized the W-2 reporting requirements for the overtime deduction. We are monitoring IRS guidance and will update clients when final instructions are issued.
Most payroll systems calculate overtime automatically but do not separately track the premium portion versus the base pay component of overtime hours. Employers may need to update their payroll software or work with their payroll provider to ensure overtime premium pay is separately tracked and reported for 2025 W-2 purposes.
Like the tip deduction, the overtime deduction applies only to federal income tax. FICA taxes — Social Security and Medicare — still apply to all wages including overtime premium pay. Neither the employer nor employee payroll tax obligation changes as a result of this provision.
The no-tax-on-overtime provision does not change employer overtime pay requirements. Employers still must pay eligible non-exempt employees at least 1.5 times their regular rate for hours over 40 per week under the FLSA. The tax benefit flows to the employee — not the employer.
We are working with all employer clients to review payroll system capabilities, prepare for updated W-2 reporting requirements, and ensure employees understand the federal deduction and Maryland conformity gap. If you have hourly workers who regularly work overtime and have not reviewed your payroll setup in light of this change, contact us. Book a consultation here.
The overtime deduction is most valuable for non-exempt hourly workers who regularly work significant overtime hours. In Frederick County, this includes:
For each week you work over 40 hours, calculate the overtime premium: (regular hourly rate × 0.5) × overtime hours. For a full year at 10 hours per week of overtime at $30/hour: $15 premium × 10 hours × 52 weeks = $7,800 in deductible overtime premium. Your employer should report this separately on your W-2 once IRS guidance on W-2 reporting is finalized.
It depends on whether you are classified as a non-exempt employee and whether your overtime is paid under FLSA rules. Most hourly nurses are non-exempt and receive FLSA overtime. If your employer pays you time-and-a-half for hours over 40 in a workweek, you likely qualify. If you are on a compressed workweek schedule with a different overtime calculation, consult a CPA to confirm eligibility.
The deduction is specifically for overtime paid under FLSA requirements — 1.5 times the regular rate for hours over 40 per week. If your employer voluntarily pays double time for weekend work as a premium above FLSA requirements, the portion above the FLSA minimum (the extra 0.5× beyond the required 1.5×) may not qualify. The IRS guidance is specific to the FLSA overtime premium and we recommend confirming your specific situation with a CPA.
Law enforcement and fire protection employees covered by the FLSA Section 7(k) exemption have different overtime thresholds than standard employees. Whether the overtime deduction applies to 7(k) workers depends on IRS guidance specific to this category of employees. We recommend public safety workers consult a CPA to determine eligibility before claiming the deduction.
Roy Cogliandolo, CPA
Mercer Flanagan · Frederick, MD · March 2026
We help Frederick County employers update payroll reporting and ensure employees understand the federal deduction — and the Maryland gap — so no one is caught off guard at tax time.
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