How the O.B.B.B. Act Will Impact Your Year-End

The One Big Beautiful Bill (O.B.B.B.) Act introduces a new federal income tax deduction for qualified overtime pay that directly affects how construction employers process payroll and report wages.

Under this new law, the premium portion of overtime pay (the “half-time” or additional pay above the regular rate) is eligible for a tax deduction of up to $12,500 for individuals and $25,000 for joint filers.

Against this backdrop, construction employers must understand how this deduction applies in practice. Let’s further explore what the O.B.B.B. Act tax deduction means for construction employers and their employees.

Exploring the O.B.B.B. Act Overtime Tax Deduction

The O.B.B.B. Act overtime deduction reduces an employee’s federal taxable income by excluding the premium portion of FLSA-qualified overtime pay.

For example, an employee earns $30 per hour and works 10 hours of overtime each week, paid at $45 per hour. The overtime premium is $15 per hour, or $150 per week. Over a year this equals $7,800 in overtime premium pay (52 x $150).

Under the O.B.B.B. Act, this amount may qualify for the federal income tax deduction because it’s under the $12,500 threshold for an individual. The employee would claim the $7,800 on their W-2 form, resulting in less taxes owed or a larger refund, depending on several factors like his or her paycheck withholding.

What Employers Need to Know

Construction employers must continue standard payroll tax withholding while separately tracking and reporting FLSA-qualified overtime compensation under the O.B.B.B. Act.

Employers must continue normal payroll tax withholding while reporting qualified overtime compensation to theInternal Revenue Service (IRS) and applicable state agencies.

It’s important to note that the O.B.B.B. Act tax deductions only apply to overtime under the Fair Labor Standards Act (FLSA).

However, holiday pay and daily overtime rates that are outlined within collective bargaining agreements (CBAs) are not eligible for the deduction.

For the 2025 tax year, employers will face no penalties from the IRS for not separating FLSA overtime from normal pay rates, holiday pay and daily overtime rates. The IRS stated:

“Treasury and IRS are aware that employers and other payors may not currently have the information required to be reported under the OBBB, or the systems or procedures in place to be able to correctly file the additional information with the IRS, or SSA in the case of a Form W-2, and provide it to employees and other payees. Moreover, the IRS has announced that Forms W-2 and 1099 for tax year 2025 will not be updated to account for the OBBB-related changes. Therefore, tax year 2025 will be treated as a transition period for IRS enforcement and administration of the new information reporting requirements for cash tips and qualified overtime compensation under the OBBB.”

For the 2025 tax season, employers are encouraged to provide employees with separate accountings of overtime compensation so employees can claim the premium portion on their tax returns.

However, starting in the 2026 tax season, employers will be required to separate FLSA overtime compensation using Box 12 on the W-2 form with the code TT.

Ultimately, the goal of this separation is to make it easier for the IRS and employees to know the exact amount that’s eligible for the tax deduction.

Simplify Your Overtime Compliance With Payroll4Construction

Effectively tracking overtime is key to compliance with the O.B.B.B. Act updates.

However, attempting to track overtime for each worker and ensure they’re compensated fairly can be difficult, especially if workers are spread across multiple states and projects.

With a leading construction payroll service — like Payroll4Construction — contractors get the peace of mind they need, even when faced with significant payroll changes. Payroll4Construction offers:

• The ability to separate FLSA overtime pay rates from regular pay, holiday pay and daily overtime.
• Free reports to help address discrepancies before filing forms with regulatory agencies
• Automated W-2 generation and distribution for each employee
• Centralized recordkeeping to help you prepare for audits and ensure your payroll is compliant
• Integration with time tracking apps to precisely track labor hours

Payroll4Construction provides a team of experts who process your payroll for you, including overtime and tax deductions, giving you more time to focus on other areas of your business.

For more information about simplifying your construction payroll talk to an expert today.