More Hours, Less Tax: What the OBBBA Means for Technicians and Employers
by Martin D. Hauptman, Esq., CPA
With long hours, last-minute jobs and seasonal rushes, overtime is a regular part of life for many in New Jersey’s automotive repair and service industry.
As part of the One Big Beautiful Bill Act (OBBBA) signed into law on July 4, 2025, a new federal tax deduction allows certain employees to exclude qualifying overtime wages from their federal taxable income, starting in tax year 2025.
This temporary measure – set to run through 2028 – has implications for both employees and employers. In industries like automotive repair and service, where overtime is routine, it’s important to understand the eligibility requirements and reporting obligations that come with the new provision.
What Is the “No Tax on Overtime” Rule?
Beginning January 1, 2025, W-2 employees can deduct up to $12,500 in overtime pay from their federal taxable income each year. Those who file jointly can deduct up to $25,000.
This deduction applies only to federal income tax. Employees will still pay Social Security and Medicare taxes, and state income taxes will apply unless New Jersey conforms to the federal changes.
Who Qualifies?
To claim this deduction, the following conditions must be met:
• You must be a W-2 employee. Independent contractors (1099) and gig workers are not eligible.
• The overtime must qualify under federal labor law – typically time-and-a-half for hours worked beyond 40 in a week, per the Fair Labor Standards Act (FLSA).
• Your Modified Adjusted Gross Income (MAGI) must be below:
• $150,000 for single filers, or
• $300,000 for married couples filing jointly. (The deduction is reduced by $100 for every $1,000 above these thresholds.)
• You must file using a status other than “Married Filing Separately.”
Example: How It Works in Practice
Leo, a certified auto technician in Newark, worked significant overtime during the summer rush in 2025. He earned $11,200 in overtime pay on top of his regular salary. His MAGI for the year was $72,000.
Under the OBBBA:
• Leo can deduct the full $11,200 of qualifying overtime pay from his federal taxable income.
• This reduces his overall income tax liability.
• Leo still pays payroll taxes on the full amount of overtime.
• His employer must report the $11,200 separately on his W-2.
What Employers Need to Do
1. Track and Report Overtime Separately
Employers must ensure that overtime wages are clearly distinguished from regular wages in payroll records and reported accurately on Form W-2 starting with the 2025 tax year.
2. Update Payroll Systems
Many payroll platforms may require updates to ensure proper classification and tracking of qualifying overtime pay.
3. Train Payroll Staff and Managers
Staff must be familiar with the new reporting obligations and any IRS guidance as it becomes available.
4. Communicate with Employees
Workers will benefit more when they understand what qualifies, how the deduction works and what documentation to retain.
Key Limitations
• No double-dipping: The same income cannot be claimed as both a tip deduction and an overtime deduction.
• No impact on payroll taxes: The deduction does not reduce liability for Social Security or Medicare taxes.
• No automatic state conformity: New Jersey income taxes are not affected unless the state legislature takes separate action.
What Comes Next
While the new tax rule may reduce some employees’ federal income tax liability, it places added emphasis on accurate payroll tracking and reporting. Employers should begin reviewing systems and policies now to ensure they are prepared for the 2025 tax year.
Martin D. Hauptman, Esq., CPA, is a Partner in Mandelbaum Barrett PC’s Tax, Trusts & Estates, and ERISA/Employee Benefits practice groups. For guidance on the OBBBA’s overtime deduction and how it may affect your payroll procedures, compliance efforts, or employee communication, please contact the Tax and Employment Law teams at Mandelbaum Barrett PC. You can reach Martin at mhauptman@mblawfirm.com or call (973) 243‑7912 for direct assistance.
Want more? Check out the September 2025 issue of New Jersey Automotive!