The information contained in this article is not intended as legal advice and may no longer be accurate due to changes in the law. Consult NHMA's legal services or your municipal attorney.
Many local governments have, in recent years, struggled with both the cost of overtime and the difficulty filling overtime shifts. A recent change in federal law may provide some indirect relief to employers by providing employees with a tax deduction for overtime wages.
The federal Fair Labor Standards Act (FLSA) enacted in 1938, established a nationwide minimum wage for employees working for employers engaged in interstate commerce. The FLSA was enacted during the Depression, a period of high unemployment. The overtime provision, which requires most employers to pay 1.5 times an employee’s “regular rate” for hours worked in excess of 40 in a pay week (53 for firefighters, 43 for police), was intended to discourage employers from working the same employees for more than 40 hours and to create work opportunities for the unemployed. The overtime penalty predated the now well-established practice of employer-provided health insurance. In many cases, the cost of providing an employee with health insurance is greater than the cost of overtime wages, so the penalty no longer serves its intended purpose. Cultural changes have also lowered the interest of some employees to work overtime hours. The prohibitive benefit cost of adding additional employees, an aging population, a decline in interest in firefighter and law enforcement careers, and the general decline in interest in overtime has resulted in unfilled shifts and the continuous use of “forced” overtime.
The new tax exemption for overtime wages may encourage some employees to more willingly work overtime hours. Effective retroactive to January 1, 2025, employees may claim an annual tax deduction of $12,500 ($25,000 if filing jointly) against overtime wages earned in the tax year. The deduction is available to all non-exempt employees (those who employers are legally obligated to pay at overtime rates), although the deduction is reduced for employees earning in excess of $150,000 ($300,000 jointly). It is important to note that the deduction only applies to overtime pay mandated under the FLSA. Contractual overtime, such as overtime for working beyond scheduled work hours in a day or overtime based on an employer’s agreement to treat certain non-work hours (vacation, sick, personal, or holiday hours) as work hours, are not eligible for the tax deduction. While the IRS has not yet issued new recordkeeping rules, it appears that employers will be required to differentiate between statutory and contractual overtime on employee W-2 forms.
Employers struggling to fill shifts may wish to inform employees of this change in the tax law as a way of encouraging overtime work. At the same time, employers must remain mindful of health and safety considerations that could arise if employees begin working excessive hours.
This is not a legal document nor is it intended to serve as legal advice or a legal opinion. Drummond Woodsum & MacMahon, P.A. makes no representations that this is a complete or final description or procedure that would ensure legal compliance and does not intend that the reader should rely on it as such.