The House of Representatives continues work on a reconciliation bill that would enact significant tax provisions and spending cuts.  The various legislative committees have completed work on the areas of the bill within their jurisdiction, including the Ways and Means Committee, which proposed language that would enact $3.8 trillion in tax cuts over the next ten years.  Over the weekend, the House Budget Committee consolidated the legislation, and the House Bill is now before the Rules Committee, where a managers’ amendment may be considered before it heads to the House floor.  This article is one of a series of articles discussing various proposals in the legislation that touch on tax withholding, reporting, and fringe benefits.

The House Bill proposes various changes to the Internal Revenue Code, including a new deduction for “qualified overtime compensation” under new section 225 of the Code.  The proposal would enact one of President Trump’s campaign promises.

The new deduction would equal the total amount of qualified overtime compensation that a taxpayer received during the taxable year.  The House Bill defines qualified overtime compensation broadly to include all overtime compensation, required under section 7 of the federal Fair Labor Standards Act, that exceeds an employee’s “regular rate.”

While the new deduction would exempt a large amount of overtime compensation from income tax, the House Bill would include some limitations on the deduction.  First, the House Bill clarifies that “qualified tip[s]” do not count as overtime.  Accordingly, taxpayers would need to rely on a separate new deduction to avoid income tax on tips.  (See separate coverage.)  The new overtime deduction also would be unavailable to “highly compensated employees:” generally, employees who are five-percent (or more) owners or receive compensation exceeding an inflation-adjusted threshold under section 414(q) ($160,000 for 2025).  Finally, to claim the deduction, taxpayers would need to have—and include on their tax return—a social security number (if a taxpayer is married, the tax return must also include the spouse’s social security number).

The deduction would be an above-the-line deduction that is available to taxpayers regardless of whether they itemize deductions or take the standard deduction. To facilitate the deduction, employers would need to include “the total amount of qualified overtime compensation” on an employee’s Form W-2.  In addition, the House Bill would instruct Treasury to adjust withholding tables to reflect the new deduction.  It is unclear how that would be implemented, but it is possible that employers could be instructed to ignore any amount of overtime in calculating the amount of withholding provided the employee is expected to be eligible for the deduction. 

The new deduction for qualified overtime compensation would be available for tax years beginning after December 31, 2024 (i.e., the current tax year of 2025), and would sunset after 2028.