If you employ a nanny, caregiver, or other household employee, there’s a new tax perk worth knowing about – especially if overtime is part of your weekly routine.
The One Big Beautiful Bill Act (OBBBA), signed into law in July 2025, introduces a new federal income tax deduction for qualified overtime compensation. It doesn’t change how payroll works week to week, but it can lower an eligible employee’s federal tax bill when they file their return.
Let’s break it down.
What’s changing with the OBBBA “No Tax on Overtime” rule
Starting in tax year 2025 (and running through 2028), employees may be able to deduct the premium portion of qualified overtime pay from their federal taxable income.
Here’s what that means in plain English:
- The deduction applies only to the overtime premium required under the Fair Labor Standards Act (FLSA).
- That premium is the “extra half-time” above an employee’s regular rate.
- This deduction is claimed when the employee files their personal income tax return – not during payroll.
A quick example
Assume your employee has the following payroll setup:
- Regular rate is $20/hour, and
- Overtime rate is $30/hour (1.5x)
The overtime premium is the difference: $10/hour.
That $10/hour is the portion that may qualify for the deduction.
What’s staying the same?
- You still pay overtime the same way.
- Federal income tax and state taxes are still withheld from every paycheck.
- Payroll taxes (like Social Security and Medicare) are unchanged.
What’s new?
- Eligible employees can claim a federal income tax deduction for qualified overtime premiums when they file their return.
- Employers should provide employees with a summary report of qualified overtime compensation by early February. The IRS has not provided an official deadline for providing access. We recommend employers share the report by early February, so employees have the materials needed to file their personal taxes.
Note: If you are a Poppins customer, this report will be automatically generated and can be found in your Employer Filing Cabinet and Employee Cubby.
What counts as qualified overtime?
To count toward this new deduction, overtime must meet FLSA standards.
For most household employers, that means:
- The employee does not live in your home, and
- The employee works more than 40 hours in a seven-day workweek
What doesn’t qualify
Some types of overtime don’t count toward the federal deduction, including:
- Overtime paid to live-in household employees, even if required by state law (such as California, Maryland, or New York)
- Daily overtime required by certain states (such as California or Colorado)
- Holiday overtime
You may still owe this pay under state law or your employment agreement. It just doesn’t qualify for the federal overtime deduction.
How does this impact employees?
First, an important reminder: Federal income taxes are still withheld as normal from every paycheck, including for overtime pay.
If an employee qualifies for this federal deduction, the benefit shows up later, when they file their tax return.
Let’s walk through an example
Assume your household employee earns:
- $20/hour regular rate
- $30/hour overtime rate
Overtime premium: $10/hour
If they work 50 hours in a week:
- Overtime hours: 10
- Overtime premium per hour: $10
- Total qualified overtime premium: $100
That $100 (plus any other qualified overtime premiums during the year) can be entered as a deduction in Part III, Schedule 1-A of Form 1040. This may lower their federal income tax liability.
What this deduction does not change
- Federal income taxes withheld during the year
- Payroll taxes (Social Security and Medicare)
- State or local income taxes
Annual limits and phase-outs (for tax year 2025)
The maximum deduction that can be claimed under the rule are the following:
- $12,500 (single filers)
- $25,000 (married filing jointly)
The deduction begins to phase out when income exceeds:
- $150,000 (single)
- $300,000 (married filing jointly)
How to use this information on personal tax returns
For the 2025 tax year, the federal overtime deduction is claimed using Schedule 1-A (Form 1040): Additional Deductions.
- Enter the total qualified overtime premium shown on this statement in Part III, line 14a of Schedule 1-A.
- Complete the remaining lines in Part III as applicable to determine the qualified overtime compensation deduction on line 21.
- After completing all other applicable sections, the total OBBBA deductions should be summed on line 38.
- Enter the amount from line 38 of Schedule 1-A onto Form 1040, line 13b.
Employer responsibilities for tax year 2025
To stay compliant, household employers should:
- Track qualified FLSA overtime premiums separately from other pay
- Summarize the total qualified overtime compensation in a written statement
- Provide employee access to that statement by early February, 2026. While the IRS has not provided an official deadline for providing access, we recommend employers share the report with employees by early February. This way, by February, employees have the materials needed to file their personal taxes.
If you use Poppins, you’re covered:
- The report will be available in your Employer Filing Cabinet
- Employees can access it in their Employee Cubby. If your employee doesn’t have their Cubby set up yet, you can send them an invite by going into your Settings > Employee Info > and clicking the link to ‘Invite [name] to set up Employee Cubby’.
Good to know
Because this is a new deduction:
- It does not need to appear on Form W-2 for tax year 2025
- A separate report is sufficient
How Poppins supports you (and your employee)
We’ll take this one off your plate.
Poppins will:
- Automatically track qualified overtime premiums
- Generate an overtime deduction report
- Make it easy for both employers and employees to access – no extra steps required
Less paperwork. Fewer questions. Everyone stays compliant.
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