or 2025, a new federal provision allows certain employees to deduct the overtime premium portion of their pay when filing their federal tax return. As tax season approaches, many restaurant employees are hearing about this deduction and wondering how it applies to them.
While the opportunity can be meaningful, it also raises practical questions. Here’s what employees should understand before filing their 2025 return.
What Is the 2025 Overtime Deduction?
Under the One Big Beautiful Bill Act (OBBBA), eligible employees may deduct the premium portion of their overtime pay or the “extra” half of time-and-a-half from their federal taxable income for 2025.
This does not reduce payroll taxes or withholdings during the year. The deduction is claimed when filing a 2025 federal tax return in early 2026.
In simple terms: employees were paid normally throughout 2025. The potential tax benefit happens later, at filing.
Who Qualifies for the Deduction?
To qualify, an employee must:
- Be non-exempt under the Fair Labor Standards Act (most hourly restaurant roles qualify)
- Earn under $150,000 in total income if filing single, or $300,000 if filing jointly
- If married, file a joint return
Managers, executives, and other exempt roles generally do not qualify.
Why Filing Season Requires Extra Attention
Unlike many tax items, the overtime deduction does not appear in a dedicated box on the 2025 W-2. Employees are responsible for calculating the deductible amount using their final 2025 pay statements. That makes year-end payroll records especially important.
If an employee can’t clearly see how overtime was structured on their pay stub, it becomes much harder to determine the deductible portion.
How the Deduction Is Calculated
The overtime deduction applies only to the premium portion of overtime pay, not the employee’s full overtime earnings. The premium represents the additional amount paid above the employee’s regular hourly wage. Since payroll systems display overtime differently, employees may need to estimate the premium portion using their pay statements.
Understanding the premium portion of overtime can sometimes require reviewing pay statements closely. Download our employee guide with real pay stub examples that walk through the deduction step by step.
When the Overtime Premium Is Listed Separately
If a pay statement lists the overtime premium separately:
• The premium line typically represents the additional half of time-and-a-half pay
• That premium amount may be used when calculating the deduction
• Employees should retain the pay statement showing the premium amount
When Overtime Pay Appears as a Single Line
If overtime pay combines regular wages and the premium in one line:
• The total overtime pay generally includes both regular wages and the premium
• Employees typically divide the total overtime pay by three
• The result represents the estimated premium portion that may be deductible
How Double Overtime Is Treated
If double overtime was paid:
• The total pay reflects twice the employee’s regular hourly rate
• Employees typically divide the total double overtime pay by four
• The result represents the premium portion that may qualify for the deduction
How This Impacts Hourly Restaurant Roles
Restaurant operations often involve variable schedules, overtime fluctuations, tip credits, and blended rates. These factors make it especially important for hourly employees to review their pay statements carefully when calculating the deduction.
Special Considerations for Tipped Employees in Restaurants
Overtime for tipped employees often includes both hourly wages and tips, which can affect how the premium portion is calculated.
Key considerations:
- Only the premium portion above the regular wage is deductible.
- Employees should determine what they would have earned at their regular hourly rate.
- The difference between that amount and total overtime paid represents the premium.
- Tip credits and blended rates make accurate pay statements critical.
Comp Time and Overtime Payouts in Operational Environments
Comp time paid out at time-and-a-half rates is generally treated similarly to overtime.
Key considerations:
- Only the premium portion of the payout may be deductible.
- This is typically one-third of the total payout.
- The payout must occur during the 2025 tax year.
- Employees should retain the related pay statement for documentation.
Federal vs. State Overtime Rules: What Employees Should Review
Not all overtime earnings qualify for the federal deduction.
Key considerations:
- The deduction applies only to overtime required under federal law.
- Federal overtime generally applies to hours worked over 40 in a workweek.
- Daily overtime required by certain states may not qualify if 40 weekly hours were not exceeded.
- Employees in states with additional overtime rules should review their pay statements carefully.
What This Means for Restaurant Operators Supporting Their Teams
While employees are responsible for their own tax filings, operators play an important supporting role in keeping payroll documentation clear and accessible. Clear earnings statements and well-organized year-end payroll records help reduce confusion during filing season. When overtime is structured and documented consistently throughout the year, employees can review their pay and calculate the deduction with greater confidence.
Join our upcoming webinar for a deeper breakdown of the OBBBA overtime deduction and what it could mean for restaurant payroll.
Supporting Clear Payroll Documentation During Tax Season
As payroll requirements evolve, restaurant operators need systems that deliver accurate calculations and clear documentation. AllianceHCM works to reduce confusion and provide reliable payroll data that supports both compliance and employee understanding.
