Beginning in 2025, the One, Big, Beautiful Bill Act (OBBBA) allows employees to potentially claim a federal tax deduction on certain overtime earnings. The OBBBA does not change how overtime is earned. It only affects what portion is reported as “qualified overtime” for tax purposes for tax years 2025 through 2028.
We recommend reaching out to your software provider to see if a report or query can be run for the 2025 data. There may need to be some software or system changes to implement this for 2026-2028.
What Is “Qualified Overtime”?
The IRS defines qualified overtime as only the extra “half-time” premium portion of overtime pay, not the full time-and-a-half rate. This information may be provided in either:
- Box 14 of the employee’s W-2, or
- A separate statement given to the employee
General County Government Employees
General (non-exempt) county employees follow the standard federal overtime rule under the Fair Labor Standards Act (FLSA): overtime begins after 40 hours worked in a 7-day workweek. Some counties choose to pay overtime earlier under local policy (for example, after 37.5 hours). While counties can continue to follow their local policy, only overtime earned after 40 hours counts for federal reporting under the OBBBA.
Example:
- Employee works 41 hours in a 7-day workweek
- Federal threshold: 40 hours
- County policy pays overtime after 37.5 hours
- County paid overtime hours: 3.5 hours
- Federal Reporting of qualified overtime hours over 40 hours: 1 hour
- Regular pay rate: $20/hour
- Overtime pay rate: $30/hour (regular pay rate of $20 x 1.5 = $30)
County pays employee:
- 3.5 overtime hours × $30 overtime pay rate = $105
Federal reporting of qualified overtime:
- 1 hour qualifies because it’s over the 40 hours FLSA threshold
- Half-time premium rate = $10 ($30 overtime pay - $20 regular pay = $10)
- 1 hour × $10 = $10
➡ Amount reported as qualified overtime: $10
Public Safety Employees Under the FLSA 7(k) Exemption (Tour of Duty)
The FLSA 7(k) exemption (often referred to as a “tour of duty”) is a partial overtime exemption for public agency employees engaged in fire protection or law enforcement activities, including security personnel in correctional institutions. It applies to sworn officers, firefighters, paramedics, and ambulance personnel, and allows for longer, non-traditional work periods with specialized overtime rules. The full federal table showing all allowable work periods and overtime thresholds under the FLSA 7(k) exemption can be found at the U.S. Department of Labor.
The OBBBA does not change how overtime is earned. It only affects what portion is reported for tax purposes. As with regular employees, only the half-time premium portion of overtime for certain public safety employees that exceeds the federal threshold is reported. We recommend reviewing IRS Notice 2025-69, Part B for determinations of what qualifies.
Example:
- Law enforcement employee works 175 hours in a 28-day period
- Federal threshold: 171 hours
- County policy pays overtime after 165 hours
- County paid overtime hours: 10 hours
- Federal Reporting of qualified overtime hours: 4 hours
- Regular pay rate: $20/hour
- Overtime pay rate: $30/hour (regular pay rate of $20 x 1.5 = $30)
County pays employee:
- 10 overtime hours × $30 overtime pay rate = $300
Federal reporting of qualified overtime:
- 4 hours qualifies because it’s over the federal threshold of 171
- Half-time premium rate = $10 ($30 overtime pay - $20 regular pay = $10)
- 4 hours × $10 = $40
➡ Amount reported as qualified overtime: $40
Qualified Compensatory Time (also referred to as Comp Time)
In the IRS Notice 2025-69, a footnote on page 25 shows that this federal reporting also applies to “qualified compensatory time” paid. It does not apply to what is simply earned or accrued. When an employee uses their comp time and it is included with their regular paycheck, this becomes a reportable event.
Example:
- Employee worked 18 hours of overtime and earned comp time 27 hours (18 hours x 1.5 = 27 hours)
- Regular pay rate: $20/hour
- Employee used 12 hours of comp time in a pay period which now makes it a reportable event
County records the earned comp time for the employee but does not report under OBBBA:
- 27 comp hours
County pays employee in their regular paycheck for the use of 12 comp time hours:
- 12 comp hours × $20 = $240
- Reduce comp time balance by 12 hours
Federal reporting of “qualified overtime” is a 1/3 calculation:
- 1/3 of the payment of $240 ($240 ÷ 3) = $80
➡ Amount reported as qualified overtime: $80
CTAS recommends involving a tax professional and suggests periodically checking the IRS for any additional notices. Also, we have found Government Finance Officers Association to be helpful.