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Overtime Tax Deduction

MEMORANDUM

To: All Non-exempt University Employees

From: Payroll/Tax Department

Date: December 16, 2025
Subject: New Overtime Tax Deduction Effective for 2025 through 2028

 

 

Dear Colleague,

We would like to inform you of a new federal tax deduction under H.R. 1, the One Big Beautiful Bill Act, which may affect how you report taxable income to the IRS from 2025 through 2028. Under this law, employees may claim a deduction of up to $12,500 ($25,000 for joint filers) on qualified overtime compensation.

This new deduction may reduce your federal taxable income for 2025–2028, and the information required to support your tax filing will be available on your Form W-2. This memo provides a high-level overview of eligibility and the steps required both by Penn and employees to take advantage of this new deduction. This communication is for informational purposes only and does not constitute personal tax advice. For guidance related to your specific tax situation, please consult a qualified personal tax professional.

 What You Need to know

Below is a summary of the key details employees should be aware of regarding this new deduction:

  • No action is required of you at this time.
  • This change applies to non-exempt employees who receive a W-2 and are covered by Fair Labor Standards Act (FLSA).
    • The deduction applies only to the premium portion of your overtime pay, or the “half (.5)” in time and a half (1.5), as required under FLSA. This refers to pay for hours worked over 40 in a work week, calculated above your regular rate of pay. In other words, this refers only to the extra amount paid for overtime, not your base hourly rate and not the full overtime rate.
  • Penn will continue to withhold federal payroll taxes (including Social Security and Medicare), as well as state and local income taxes, from your overtime pay. Any potential tax savings from this new deduction will be realized when you file your annual federal income tax return.
    • The deduction applies to federal income tax liability only.
  • The deduction is available to all individuals, including those who claim the standard deduction.
  • Married individuals must file a joint return to claim the deduction.
  • When preparing your taxes, ensure your tax preparer or tax software recognizes the qualified overtime deduction.

Key Benefits

This new deduction offers several potential advantages for eligible employees:

  • Deduction of up to $12,500 (individual) or $25,000 (joint filers)
  • Available to   those who itemize deductions and those who use the standard deduction
  • Reduces your taxable income, which may increase your refund or lower your tax liability

Income Limits

Eligibility for the deduction depends on your Adjusted Gross Income (AGI). The benefit is subject to income limits and phases out at higher income levels:

  • $150,000 Adjusted Gross Income (AGI) for single filers
  • $300,000 AGI for joint filers

If your AGI is below these thresholds, you may be eligible to claim the full deduction.

 Reporting Requirements

To ensure compliance and help you benefit from this deduction, Penn will provide the information you need at tax time to ensure accurate reporting of qualified overtime compensation:

  • For the 2025 tax year, the amount of qualified overtime pay will be reported on your Form W-2 in Box 14 labeled ‘OVT’.
  • For tax years 2026-2028, qualified overtime pay will be reported separately on your Form W-2.

For More Information

If you have questions, please contact the Penn Employee Solution Center at solutioncenter@upenn.edu or (215) 898-7372.

Note: The University is NOT permitted to assist with any IRS tax form preparation or tax related questions. Any tax questions or concerns should be directed to a certified tax preparer or a local IRS field office.