Overtime pay and benefit changes take effect under new federal law

Effective July 4, 2025, the One Big Beautiful Bill Act introduces key changes affecting federal income tax, overtime pay and employee benefit programs. The summary below outlines tax implications for employees eligible for overtime under the Fair Labor Standards Act (FLSA). Employees are encouraged to consult a tax professional for detailed guidance.

Overtime pay deduction for FLSA nonexempt employees

• Employees classified as nonexempt under FLSA may deduct a portion of overtime earnings from federal taxable income for tax years 2025 through 2028.
• The deduction applies only to overtime pay required by FLSA.
• Individuals may deduct up to $12,500 in qualifying overtime pay per year. Joint filers may deduct up to $25,000 annually.
• Deduction eligibility phases out for individuals with adjusted gross incomes above $150,000 or married couples with income above $300,000.
• The deduction is applied when filing personal income tax returns.

Key considerations

• The deduction reduces taxable income but does not exempt overtime pay from taxation.
• Payroll taxes, including Social Security and Medicare, as well as state and local income taxes, still apply.
• Employees will see the benefit during annual tax filing, not as an increase in take-home pay.
• Only FLSA nonexempt (overtime-eligible) employees are eligible. FLSA exempt employees are not eligible.
• Starting in 2025, overtime wages will be separately reported W-2s.

Health Saving Accounts (HSA) flexibility

Beginning with health plans effective Jan. 1, 2026, the bill introduces flexibilities for HSAs:

• High Deductible Health Plans (HDHPs) may now cover telehealth services before the deductible is met.
• All Bronze and Catastrophic plans under the Affordable Care Act (ACA) will be considered HDHPs for HSA eligibility.
• Direct primary care arrangements will be recognized as HSA-qualified medical expenses.

Increase to dependent care assistance program limit

The annual tax-free limit for employer-sponsored dependent care assistance increases as follows, effective Jan. 1, 2026:

• From $5,000 to $7,500 per household.
• Up to $3,750 for married individuals filing separately.

For the latest guidance, visit IRS.gov. Boise State Human Resources and Workforce Strategy will continue to monitor and communicate relevant updates as they are made available. Questions may be directed to hrs@boisestate.edu.

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