OBBA: What ‘No Tax on Overtime’ Means and How City Will Implement the New Law

As you may know, the commonly-known “One Big Beautiful Bill Act” signed into law on July 4, 2025, includes a new provision entitled “No Tax on Overtime.”  The City will soon be sending a communication to explain how the City will be implementing it.

First, to be clear, although this provision of the new law is entitled “No Tax on Overtime,” the IRS has published Notice 2025-69 to explain the details.  This new law provides an EE with the opportunity to take a deduction on their income tax return for any year in which certain FLSA-required overtime was paid.  There are limits on the amount of the available annual deduction allowable per taxpayer if filing separately or jointly and also based on adjusted gross income.  Employees should consult their own tax professional with regard to these issues.  What’s important for you to know as a City EE is how the City will be complying with this new law and how you will get the information you need to determine any available deduction.

Second, the “no tax on overtime” name associated with this new law is a bit misleading as all overtime must still be taxed on payday and every dollar paid in overtime will continue to be subject to payroll tax withholdings which will be shown on your paystub.  The “tax break” on overtime paid for the year will only come, if you qualify for it, when you file your return.

Third, this new law only affects overtime which is paid per the requirements of the federal Fair Labor Standards Act or FLSA.  No deduction on your tax return will be allowed for overtime paid in excess of what the FLSA requires because the City is complying with more generous California State Law overtime provisions and/or with more generous overtime provisions required by your MOU.

Fourth, this new law only affects the “overtime” portion of your FLSA-required overtime pay — i.e., if time-and-one-half is paid, the “regular time” is fully taxable with no deduction later available on your return.  Only the extra half-time portion of the payment will count toward any allowable deduction.

With these key points in mind, the City’s communication will explain what it’s “dual calculation” payroll practice means to distinguish FLSA-required vs. other forms of overtime paid under State law or contract and how you will learn annually what portion of the overtime paid to you may be eligible as a deduction within the meaning of this new law.

If you have any questions please don’t hesitate to reach out to your Labor Relations Officer or MEA at 619-264-6632 or info@sdmea.org.