As part of the ‘One Big Beautiful Bill Act’, there is a new tax deduction coming for overtime pay. For household employees who are frequently called upon to work above and beyond their regular 40 hours a week, this will be a way to lower taxes.
For household employers, it’s crucial to stay informed on what payroll processes will need to be adjusted to ensure tax compliance.
How the New Overtime Tax Deduction Works
Under the new federal law, household employees can reduce their federal taxable income by up to $12,500 (filing single) or up to $25,000 (married filing jointly). It’s important to note that these numbers are subject to some rules defined below.
- The exact benefit depends on the employee’s tax bracket and how much qualifying overtime is earned.
- The deduction applies only to overtime governed by the Fair Labor Standards Act (FLSA), which is usually above 40 hours a week. Importantly, only the overtime “premium” is deductible—that’s the additional half-time pay on top of the regular rate. For example, if your base rate is $20 an hour, your overtime rate becomes $30. The $10 difference per overtime hour is the portion eligible for the deduction.
- This is an “above-the-line” deduction. Household employees can still take the standard deduction while also reducing taxable income through this new benefit.
Keep in mind, this opportunity is temporary. The government has authorized the overtime tax deduction only for tax years 2025 through 2028. For employees who regularly work extra hours, it’s a short-term way to reduce taxable income.
Important Must-Knows for Household Employers
The new law introduces important changes for household employers beginning in 2025, as well. One of the most noteworthy updates is a new Form W-2 reporting requirement.
Employers will need to separately identify the portion of an employee’s pay that qualifies as overtime compensation.
To ease the transition, the IRS has created a special rule for 2025. During this first year, employers aren’t required to precisely calculate every eligible overtime dollar. Instead, they’re allowed to estimate the qualified overtime amount. This not only gives household employers time to adjust their payroll processes while the IRS rolls out more details.
In subsequent years, withholding procedures will also change. After December 31, 2025, the IRS will update payroll withholding tables and methods so that employees’ paychecks more easily showcase the overtime tax deduction. For household employers, this may involve adjusting payroll calculations, especially if an employee regularly works overtime.
How to Prepare
Both household employees and employers will need to adapt to these new overtime tax deduction rules. In order to prepare, employers and employees should take some time to learn how the deduction works, set up systems to track overtime premiums accurately, and watch for future IRS updates.
Working with a valued payroll partner is also important. Household Staffing partners with several respected payroll providers to ensure household workers are paid on time and on the books, while employers ensure they are tax compliant each step of the way.
Household Staffing is Poised to Help
Ready to hire your in-home employee? Perhaps you’re looking for your next domestic staffing role. You can rely on our nearly three decades in the staffing industry, where we have placed thousands of highly trained and specialized individuals in homes and offices around the country.
Our recruiting team works alongside household employers to learn their exact needs for their home. Our friendly and dedicated team values a personal approach, getting to know candidates and their unique skillset and experience to better match them with roles that align with their expertise.
Contact us today to get started on the hiring and interview process, or to begin the search to grow your household staff. We look forward to working with you!
