President Trump repeatedly said he wanted “no tax on overtime” in the recently enacted “One Big Beautiful Bill Act” (OBBBA) he signed into law on July 4th. Well, it didn't turn out exactly that way. Employees who are eligible for overtime compensation are still subject to federal income tax for their hours worked – including overtime – but they will now benefit from a significant tax break. This is a foundational element of the new law designed to help low- and middle-income wage earners. For EMS, that means almost all employees who are not exempt from overtime (and who work overtime) will benefit and see big tax savings that could be hundreds of dollars a year depending on how much overtime they work.
Under the OBBBA overtime provisions, Chapter 2, Section 70202 of the OBBBA, employers will still have to withhold federal income taxes from all eligible wages, including overtime. But employees will then be able to reduce their tax burden for a significant portion of the overtime that they work as that portion will be deducted from federal taxable income. Good news: the law is retroactive to January 1, 2025, so the tax deduction will apply to overtime for this year. Bad news: the law has limitations and employees may only deduct from their federal income taxes the premium portion of that overtime up to $12,500 ($25,000 if filing jointly) annually. And the law “sunsets” at the end of tax year 2028.
Despite these limitations, this new tax break could result in employees effectively reducing their federal income tax by hundreds and even thousands of dollars annually. This is clearly a big win for employees, especially EMS and public safety employees who have had to work excessive amounts of overtime since the pandemic. The law adds an incentive for employees to work overtime, which may help significantly with staffing issues (but there are downsides discussed below).
Key Provisions of the Law and How it Works
Deduction is Capped. This new deduction is capped at $12,500 for single filers and $25,000 for joint filers. It is also phased out for high earners, by $100 for each $1,000 by which the employee’s modified adjusted gross income exceeds $150,000 ($300,000 in the case of a joint return). This high-income limitation will likely not impact many front-line EMS employees.
Only Qualified Overtime Can be Deducted. In other words, only overtime payments required by law (the Fair Labor Standards Act (FLSA)) will be eligible for the deduction. For example, if an employer pays “double time” for weekend shifts, the “double time” payment is not required under the FLSA and would be eligible only to the extent that overtime must be paid as required under the law. And additional overtime compensation paid pursuant to heightened state-law requirements or negotiated under collective bargaining agreements will not qualify for the deduction.
Qualified Overtime Still Subject to Other Taxes. The qualified overtime is still “wages” for FICA tax purposes, meaning the wages are still subject to Social Security and Medicare tax as well as any other required state law taxes.
Applies Only to the Premium Compensation Paid in Excess of the Regular Rate of Pay. To simplify this, the deduction can only be taken for the “half” of “time and a half” payments for overtime. For example, if an employee’s regular rate of pay is $20 per hour, the employee’s overtime rate (time and one-half) is $30.00 per hour. Only the $10.00 overtime premium (the “half”) for that hour may be deducted. So, if that employee works 50 hours in a workweek and was paid overtime for 10 of those hours, the employee could only deduct from federal income tax, $100 of the pay for that week (10 overtime hours x $10 premium payment = $100).
Can Only Deduct What is Properly Reported. Individuals can only deduct overtime that is reported on certain information returns, such as Form W-2. Currently, overtime pay is not identified separately from regular wages on Form 941 or Form W-2 – it’s all lumped together as “Wages, Tips and Other Compensation” on Box 1 of the W-2. The IRS will be issuing guidance on how to separate out the eligible overtime pay on the W-2. For 2025, employers can approximate a separate accounting of amounts designated as overtime by “any reasonable method” that the IRS will need to specify to comply with the reporting requirements. More IRS guidance is to come from the feds on recordkeeping.
The Big Issues and Questions for EMS
Need Payroll System adjustments to Track the Eligible Overtime Payments. As guidance comes from the IRS, employers will need to work closely with their payroll management providers to ensure that eligible overtime is properly accounted for and reported on the W-2 and other forms.
Will This Tax Break Provide a New Incentive to Work More Overtime? It could influence those who don’t like working overtime to do so now to take advantage of the tax break, which essentially increases effective earnings. It could cause employees who love the overtime pay to resist any changes to the schedule that would reduce the amount of overtime they are accustomed to working. That can lead to workplace issues as employers try to balance employee needs and wants.
What Will the Impact Be on Staffing and Overtime Management? This benefit adds a new dimension for employers and will need to be evaluated. Can it help with retention and recruitment? Will employees “expect” more overtime so they can benefit from the tax savings? Will employers need to hire more part-time employees to reduce excessive overtime? Employers will need to evaluate the multi-faceted impact this provision will have on staffing and overtime and adjust accordingly.
How Will this Impact Burnout, Compassion Fatigue, and Other Issues Associated with “Overworked” Clinicians? Studies show that excessive work time can lead to medical errors, behavioral issues and other problems. Employers will need to fine tune their policies to ensure that employees who work added overtime are still able to function effectively.
How Will You Distribute Overtime Fairly? With this significant new tax benefit for employees, there may be renewed interest in working more overtime. Employers will need to develop policies on how to distribute this overtime fairly or else they could end up with morale and other relationship issues in the workplace.
Be Careful with Attempts to “Convert” Employees Currently Not Exempt from Overtime to an Exempt Employee. The FLSA has strict regulations on who is exempt from overtime (the so-called “white collar” overtime exemption rules apply and have not changed). Some administrative, executive and professional employees can be exempt from overtime but only if they meet the strict “duties” and “salary basis” tests. Those exemptions would generally not apply to front line EMS staff.
Educate and Manage Employee Expectations. The media was filled with reports that employees may not have to pay any tax on overtime with the OBBBA. They may have thought that their pay would instantly go up once the law was enacted. It's important to educate employees about the new provisions and that these are tax deductions and not “raises” and that they won’t see the benefit of it in their pocket until they file their 2025 tax returns in 2026. Employers need to communicate frequently what changes the employees can expect.
The Bottom Line: The overtime deduction under the OBBBA provides a new benefit for hard working employees that does not cost the employer much money other than the price of administering the changes. EMS employers need to work now to educate their employees on the impact that this new law will have on them and the organization, and take the steps needed to ensure their questions are answered and that overtime is handled in a fair and consistent manner.
We’re Here to Help…
Any questions, please reach out to us. We are here to help. The PWW|AG team can assist EMS agencies with modeling the impact of many of these changes and the effect the new law will have on your revenue cycle and daily operations. We can assist you in evaluating the overall impact of the OBBBA on all aspects of your EMS or mobile healthcare agency. Contact: contact@pwwag.com
