The Overtime Tax Break from the OBBBA Explained

Oct 23, 2025 | GTM Blog, Household Employee Management

The One Big Beautiful Bill Act (OBBBA) introduces the “No Tax on Overtime” rule. While it doesn’t change how you run payroll, it directly affects your employee’s federal income tax liability and imposes new documentation requirements on you, the employer.

Here is what every household employer needs to know about the change:

What the OBBBA “No Tax on Overtime” Rule Does

Signed into law in July, the OBBBA is a large bill with one key update affecting household employment:

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 for the employee.

What Overtime is NOT Eligible?

It is crucial to understand that many 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 laws (like in New York, California, and Maryland).
Daily Overtime: Premiums required under certain state laws for working more than 8 hours in a day (like in California and Colorado).
Enhanced Premiums: Double time, holiday pay premiums, or guaranteed overtime hours that are not directly tied to FLSA-mandated hours.

While you still must pay these amounts based on state law or your employment agreement, the employee cannot claim the federal tax deduction on those premium payments.

How This Impacts Your Household Employee

This is a direct benefit for your household staff: they can deduct the federal overtime premium from their gross income, reducing their final federal tax liability.

Deduction Limits: The employee can deduct up to $12,500 (individuals) or $25,000 (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. Those contributions remain exactly the same.

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.

In Conclusion

The OBBBA offers a valuable new tax benefit for household employees who regularly work more than 40 hours per week. For household employers, it translates into a new documentation and reporting requirement to ensure compliance. To ensure you are compliant with the new rules and reporting requirements, contact us today at (800) 929-9213 or book a complimentary, no-obligation consultation.