The One Big Beautiful Bill Act (OBBBA), which President Trump signed into law last year, includes a new federal income tax deduction related to overtime pay. While the new income tax deduction may be available to some employees who work overtime, only a limited portion of federally required overtime compensation is tax deductible.

For tax years 2025 through 2028, individuals who receive qualified overtime compensation under the Fair Labor Standards Act (FLSA) may deduct the amount that exceeds their regular rate of pay (generally, the “half” portion of “time-and-a-half” compensation) and is reported on a Form W-2 or Form 1099.

This change has resulted in questions on how to report qualified overtime compensation paid to
employees.

Definition of Qualified Overtime Compensation
• “Qualified overtime compensation” is defined as overtime pay required under section 7 of the FLSA (29 USC § 207) that is in excess of the regular rate at which the individual is employed.
• The FLSA generally requires overtime pay at not less than one and one-half times the regular rate for hours worked over 40 in a work week, but there are exceptions and special rules for certain employees and employers.

For 2025, the IRS has not updated W2, 1099-NEC and 1099-MISC to provide any separate accounting information of Qualified Overtime Compensation.

Employers and payors are not required to separately state this information. For tax years 2026 and later, employers are required to separately report qualified overtime compensation. Forms W-2, 1099-NEC, and 1099-MISC will be updated to allow employers to provide separate reporting of an individual’s qualified overtime compensation.

This means that taxpayers must determine the amount of Qualified Overtime Compensation using available documentation such as pay stubs or statements.

Employees already exempt from FLSA overtime are not eligible for this specific overtime deduction, as they don’t earn FLSA-mandated premium overtime.

Employees are still required to report overtime compensation as taxable income and will need to work with their own tax advisors to determine whether they qualify for the overtime deduction – however, this only applies to non-overtime exempt employees.

Information for employers and employees is available online through a recently published Fact Sheet by the IRS at: https://www.irs.gov/newsroom/questions-and-answers-about-the-newdeduction-for-qualified-overtime-compensation

Questions regarding overtime exemptions continue to be common due to the many exemptions that exist depending on an employee’s job description and duties.

Unless specifically exempted, employees covered by the FLSA must receive overtime pay for hours worked in excess of 40 in a workweek at a rate not less than time and one-half their regular rate of pay.

Overtime Exemptions
The following “white collar” exemptions apply to automotive dealerships. If an employee falls under one of these overtime exemptions, they don’t qualify for FLSA-mandated premium overtime and would not qualify for the income tax deduction under the OBBBA.

An employee must meet one of the following three (3) exemptions regarding primary job duties, and be paid on a salary basis of at least $684 a week ($35,568 annually), unless otherwise noted:

1. Administrative Employee Exemption:
• Engage in office or non-manual labor directly related to the management or general business operations of the dealership or its customers; and
• use discretion and independent judgment regarding matters of significance.

Activities related to dealership management or general business operations include: operations financing, accounting, budgeting, auditing, insurance, purchasing procurement, advertising, marketing, safety/health, personal management, computer, internet and database administration, legal and regulatory compliance, etc.

This exemption typically applies to:
• dealership assistant departmental managers
• office managers
• human resource personnel

This exemption typically does not apply to:
• clerks
• lot boys
• cashiers
• secretaries
• those whose main duties involve bookkeeping, payroll preparation, sending out monthly statements of account or routine clerical duties.

Dealers should review employees’ job duties and written job descriptions to ensure they involve the use of discretion and independent judgment regarding matters of significance. An employee who simply applies protocols or provisions from a manual on a case-by-case basis is likely not exempt.

2. Executive Employee Exemption:
• Manage an enterprise (i.e., dealership), or a recognized department of an enterprise;
• regularly direct the work of two or more employees; and
• have the authority to hire or fire employees (or their recommendations as to hiring or firing employees are given great weight).
This often applies to dealers, dealership department managers and shop foremen.

3. Professional Employee Exemption:
• Perform work requiring advanced knowledge in a field of science or learning, customarily acquired by a prolonged course of specialized intellectual instruction.
This typically applies to in-house dealership attorneys and accountants, but not accounting clerks or bookkeepers.

Highly Compensated Employee Exemption
• Performs office or non-manual work and is paid a total annual compensation of $107,432; and
• regularly performs at least one of the duties of an exempt executive, administrative or professional employee. This applies to most “white collar” dealership employees earning over $107,432.

Additional Automotive Overtime Exemptions
The following three employee types must spend at least 50% of their time performing their specified duties to be exempt from overtime. These exemptions do not have a salary requirement.

Salespeople make sales or obtain orders/contracts for the sale of automobiles, trailers or trucks. Work performed incidental to and in conjunction with a salesperson’s sales or solicitations (i.e., deliveries and collections) fall within this exemption.

Parts department workers order, stock, pull and sell parts. Parts delivery people do not qualify for this exemption.
Technicians perform skilled mechanical work, such as service, reconditioning and body shop mechanics, which includes, but is not limited to, replacing mufflers, replacing brake shoes, doing tune-ups, etc. Activities not considered mechanical are painting, cleaning, polishing, tire changing and lubrication.

Dealership Service Advisors fall within the “salesmen, partsmen, and mechanics” overtime pay exemption under the federal Fair Labor Standards Act. A 2018 decision by the Supreme Court upheld more than 40 years of consistent
interpretation by the courts and the U.S. Department of Labor on this issue.

Commissioned Employees
• Commissioned employees are compensated by commission for either sales made or services performed.
• The employee’s regular rate of pay must exceed 150% of the applicable minimum hourly rate; and
• More than half of the employee’s compensation for a period not less than one month must derive from commissions on goods or services.

For more information, review the Fact Sheet at: Questions and answers about the new deduction for qualified overtime compensation | Internal Revenue Service