New Federal Tax Deduction on Overtime: How Florida Employers and High-Income Professionals Benefit in 2025

Starting January 1, 2025, a major federal tax shift is changing how Florida business owners, investors, and high-income professionals approach payroll and compensation.

The One Big Beautiful Bill Act (OBBBA), passed in July 2025, allows workers to deduct a portion of their overtime pay from their federal taxable income. This isn't a policy proposal anymore — it's law.

If you're running a small business, managing real estate assets, or overseeing labor-intensive teams, this new deduction creates a rare chance to enhance employee compensation without raising gross wages, while also unlocking strategic tax advantages.

We help Florida's growth-focused clients move fast and plan smart around legislative shifts like this.

🔍 Not sure how this new law affects your business? Book a free 15-minute consult with a Square Accounting advisor today.

What Is the Overtime Deduction Under the OBBBA?

The federal law doesn't make overtime "tax-free" — but it does allow a deduction of the time-and-a-half overtime premium (the "half" portion above regular pay).

Key Points:

• Effective: Retroactively from January 1, 2025 through 2028.

• Deductible Portion: Only the 0.5x premium portion of overtime.

• Caps:

• $12,500 for Single filers

• $25,000 for Married Filing Jointly

• Phase-Out Thresholds:

• Begins at $150,000 (Single)

• $300,000 (Married Filing Jointly)

Payroll Taxes (FICA, Medicare): Still apply — this is a federal income tax deduction only.

Why It Matters for Florida Business Owners

Florida's zero state income tax amplifies the benefit. Employers in real estate, construction, healthcare, hospitality, or logistics who rely on hourly workers now have a federal incentive to offer overtime without raising overall labor costs.

Strategic Wins for Business Owners:

• Increase employee net pay without raising gross wages

• Reduce turnover and improve morale

• Attract skilled hourly labor with competitive after-tax income

• Avoid unnecessary raises by leveraging tax-advantaged compensation

💼 Curious how this deduction impacts your labor model? Square Accounting offers custom Payroll Optimization Reports for Florida businesses.

📊 See how much this deduction could save your business. Request a personalized Labor Cost Impact Analysis from our team.

Real-World Impact: Scenario Example

Let’s say you operate a cleaning and maintenance company in Tampa. You employ 12 techs who each log 15 hours of overtime weekly during peak months. At $30/hour, that’s roughly $337.50/week in OT.

Under the new law, your workers could deduct the 0.5x premium — saving $100–200 per paycheck depending on tax bracket. You don’t increase wages, but their net income rises. That keeps your payroll flat while boosting retention.

Eligibility & Limitations: Know the Boundaries

This isn’t a universal benefit. To qualify:

✅ Eligible:

• FLSA-covered hourly employees

• Workers earning under income phase-out thresholds

• Any sector where overtime is tracked separately

❌ Not Eligible:

• Rail, airline, maritime, and some union workers

• Employees covered under conflicting state/local OT laws

• Salaried exempt workers

• High earners above $150K/$300K thresholds

New Tax Planning Moves for High Earners & Investors

If you're managing multiple LLCs, paying in-house staff, or leveraging 1099 support, this law should trigger new thinking about entity structure and compensation planning.

Tax Strategies to Consider:

• Shift performance bonuses into OT-based scheduling

• Rework LLC compensation flows to maximize deduction eligibility

• Offer overtime-friendly schedules during seasonal surges

• Track overtime by entity to align with reporting structures

📈 Maximize S-Corp and LLC alignment under the new law. Square Accounting helps clients structure compensation for tax efficiency.

Payroll & Compliance Adjustments You Need to Make

The new deduction brings added complexity. Employers will need to:

• Configure payroll tools (Gusto, ADP, QuickBooks) to track deductible OT

• Update W-2 documentation to clearly reflect overtime amounts

• Maintain detailed records for audit defense

• Educate employees on the deduction so they claim it properly

✅ Already using payroll software? Let us help you sync your system with federal law to avoid errors and maximize benefits.

Florida Advantage: State Policy & Local Impact

Because Florida has no income tax, the federal overtime deduction delivers pure net benefit for employees — no offsetting state clawback.

This makes Florida a standout for:

• Tourism and hospitality sectors with high OT hours

• Real estate services and property maintenance

• Logistics and supply chain operators

• Home healthcare and construction crews

These sectors can now reward productivity with real, after-tax earnings increases.

Bonus Insight: "No Tax on Tips" Also Passed

The same legislation includes a similar deduction for reported tips up to $25,000. If your workforce earns both overtime and tips, you can now offer total compensation strategies that are both tax-advantaged and retention-friendly.

Have tipped and hourly staff? Get our combined OT + Tips Deduction Playbook to maximize tax efficiency.

Quick FAQ

Q1: Is overtime pay tax-free now?

No, but a portion is deductible from federal income taxes.

Q2: How much can I deduct?

Up to $12.5K (Single) / $25K (Married Filing Jointly).

Q3: Do I still pay payroll taxes?

Yes. FICA and Medicare still apply.

Q4: Who qualifies?

Hourly workers under income thresholds.

Q5: Does this apply in Florida?

Yes, and more beneficial due to no state income tax.

Final Word: Use the Law to Strengthen Your Bottom Line

This new overtime tax deduction isn’t just a perk for workers. It’s a strategic lever for business owners, real estate investors, and high earners.

It lets you:

• Improve employee retention and morale

• Optimize entity-level compensation strategies

• Stay compliant while gaining a tax edge

Don’t wait. This law is already in effect.

📲 Schedule a private strategy session with Square Accounting to analyze how the overtime deduction and related laws can benefit your workforce and entity structure.

📧 Subscribe to our Insider Briefing for exclusive Florida-focused tax updates and implementation checklists.

Square Accounting – Florida’s Premier Partner for Tax-Smart Growth.

🚀 Ready to optimize your compensation strategy for 2025? Schedule a full Tax Efficiency Review with our experts today.
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