This new federal income tax deduction specifically targets the premium portion of overtime pay — or the additional 0.5x regular rate that employees earn for hours worked beyond 40 in a workweek. The deduction applies only to federal income tax withheld from this overtime premium, not regular pay-rate compensation. On April 23, 2024, the United States Department of Labor (DOL) released a final rule on overtime exemption.
The overtime pay requirement may not be waived by agreement between the employer and the employee. The overtime pay requirement cannot be met through the use of compensatory time off (comp time) except under special circumstances applicable only to state and local government employees. The white-collar exemption applies to employees who perform primarily executive, administrative, and professional tasks. Workers who perform these tasks are considered to have more autonomous, managerial, or specialized roles justifying exemption from overtime. Therefore, if an employee’s duties are executive, administrative, and professional, and they satisfy the salary basis and salary level tests in the FLSA, they are not entitled to overtime pay under the FLSA.
Regulations
In addition to being paid on a salary basis, an employee must also earn a salary that meets a minimum specified amount per week to qualify for the EAP exemptions. While hourly employees have a straightforward overtime calculation, salaried employees who qualify for overtime (non-exempt salaried workers) must have their regular hourly rate determined first. This overtime policy template details procedures for managing overtime pay compliance for nonexempt employees.
Executive, Administrative, and Professional Fact Sheets
Despite this new deduction, core overtime obligations remain unchanged. Similar to the tips deduction, for every $1,000 of income above the threshold, the deduction is reduced by $100, ensuring benefits target middle and lower-income workers. CDA members have access to a comprehensive human resources solution that includes payroll processing.
- �Nonexempt� means that the covered employee is entitled to the law�s minimum wage and/or overtime requirements.
- The proliferation of artificial intelligence in the workplace, and the ensuing expected increase in productivity and efficiency, could help usher in the four-day workweek, some experts predict.
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- In cases where an employee is subject to both the state and federal overtime laws, the employee is entitled to overtime according to the higher standard (i.e., the standard that will provide the higher overtime pay).
The FLSA does not require overtime pay for work on Saturdays, Sundays, holidays, or regular days of rest, unless overtime hours are worked on such days. Thus, as long as the employer pays the employee at least $684 on a weekly salary basis, the employer will be able to count these other forms of compensation toward meeting the minimum total compensation requirement ($107,432 per year). The FLSA requires that most employees in the United flsa overtime rules States be paid at least the federal minimum wage for all hours worked and overtime pay at not less than time and one-half the regular rate of pay for all hours worked over 40 in a workweek. For covered, nonexempt employees, the Fair Labor Standards Act (FLSA) requires overtime pay (PDF) to be at least one and one-half times an employee’s regular rate of pay after 40 hours of work in a workweek. Some exceptions apply under special circumstances to police and firefighters and to employees of hospitals and nursing homes.
College football overtime rules 2025: Explaining how the NCAA OT format works and differences from NFL
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- Regardless of the reason for the investigation, all investigations are conducted in accordance with established policies and procedures.
- Notably, the types of duties eligible for exemption are not impacted.
Revisions included increases to the standard salary level and the highly compensated employee total annual compensation threshold, and a mechanism for updating these earnings thresholds to reflect current earnings data. District Court for the Eastern District of Texas vacated the Department’s 2024 final rule. Consequently, with regard to enforcement, the Department is applying the 2019 rule’s minimum salary level of $684 per week and total annual compensation requirement for highly compensated employees of $107,432 per year. Lawsuits regarding the 2024 final rule are currently pending in two other federal district courts, and the United States has filed a notice of appeal from the November 15 decision. The Department will update this notice with additional information as it becomes available.
Registered nurses who are paid on an hourly basis should receive overtime pay. However, registered nurses who are registered by the appropriate State examining board generally meet the duties requirements for the learned professional exemption and, if paid on a salary basis of at least $684 per week, may be classified as exempt. The new rule increases the salary thresholds in the salary level test for highly compensated and white collar employees. As a result of the changes, less employees will be considered exempt and employers will be liable for significantly more overtime pay.
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Employers need to adjust their payroll systems to comply with a provision of the One Big Beautiful Bill Act that exempts qualifying overtime compensation from federal income tax. As per the U.S. federal law, every hour an employee works beyond 40 hours in a workweek must be compensated at one and a half times the employee’s standard hourly rate. Additionally, the rules allow employers to use non-discretionary bonuses, incentives, and commissions to satisfy up to 10% of the required standard salary level, provided these payments are made at least annually. There’s also a provision for a “catch-up” payment at the end of the year if needed. This rule will have a significant impact on Pennsylvania employers, potentially reclassifying millions of currently exempt employees as non-exempt and eligible for overtime pay. Employers who fail to comply risk costly back pay, penalties, and lawsuits.
It isn’t a perfect system, but the fact that the league is willing to consider alternatives and improvements has to have college football fans pleased. As with many payroll compliance challenges, leveraging modern HR and payroll software can help automate the complex tracking and reporting requirements introduced by this temporary but impactful tax change. The IRS in a fact sheet states that it will provide some “transition relief” both for taxpayers and employers for the current tax year, but CDA Employment Practices Analyst Michelle Coker says a payroll-system change is not one to put off until end of the year.
Understanding what counts as qualifying overtime is something employers should have on their to-do list, as not all overtime policies qualify for this federal deduction. This article is authored by OnPay, a top-rated payroll provider for small businesses with more than 30 years of experience in payroll, taxes, and small business compliance. The No Tax on Overtime provision is a targeted tax incentive aimed at giving working Americans more benefits from their additional hours.
Employers are required to keep records on wages, hours, and other items which are generally maintained as an ordinary business practice. The Fair Labor Standards Act (FLSA) Overtime Calculator Advisor provides employers and employees with the information they need to understand Federal overtime requirements. The regular rate is calculated by dividing the total pay for employment (except for the statutory exclusions) in any workweek by the total number of hours actually worked to determine the regular rate.
Payroll taxes are unchanged as Social Security and Medicare taxes (7.65% each) still apply to all overtime earnings. The “no tax on overtime” deduction is then taken by the employee on their individual income tax return, Form 1040. Section in the recently passed legislation, H.R.1, or the One Big Beautiful Bill Act, which was signed into law in 2025, includes a federal tax deduction that could significantly impact overtime-eligible workers and their employers. The “no tax on overtime” provision allows eligible employees to reduce their year-end federal adjusted gross income (AGI) by up to $12,500 ($25,000 for joint filers) when they file their taxes for years 2025 – 2028. Workweeks that exceed 40 hours and result in qualifying overtime pay may be less common in some professions, and the change is primarily an administrative one for employers. Still, employers will need to work with those responsible for processing payroll or contact their payroll provider to ensure they are compliantly tracking and reporting any qualifying overtime pay to the IRS and on W-2 forms and paystubs.
Importantly, the new rule also includes a mechanism for automatically updating these salary thresholds every three years based on current wage data. This means employers will need to stay vigilant for future increases. This content is based on generally accepted HR practices, is advisory in nature, and does not constitute legal advice or other professional services. ADP does not warrant or guarantee the accuracy, reliability, and completeness of the content. Employers are encouraged to consult with legal counsel for advice regarding their organization’s compliance with applicable laws.