Healthcare employers, especially health systems, hospitals, and senior service organizations that process payroll internally, will feel the impact of the One Big Beautiful Bill Act’s (OBBBA) new overtime deduction more than most industries. This workforce depends on extended shifts, daily and 14-day overtime rules, and frequent pay edits. Most existing payroll and timekeeping setups were not built to isolate the premium portion of OT now required for tax reporting.
The result? A well-intended benefit for staff that creates real operational risk heading into 2026.
At-a-Glance – How the Deduction Works
| Deductible Pay | Who may claim | Annual dollar cap | Phases-out threshold | Effective Dates |
| Only the FLSA-required premium (i.e., the ½ portion of “time-and-a-half” pay) | FLSA-non-exempt employees | $12,500/$25,000 joint, adjusted for inflation | When modified adjusted gross income reaches $150,000/$300,000 joint, the deduction is reduced by $100 for each $1,000 over that amount, and the deduction if fully unavailable when the modified adjusted gross income reaches $275,000/$550,000 joint (amounts will be adjusted for inflation in future years). | For tax years 2025-2028 |
Why Healthcare Is Heavily Impacted
- Staffing shortages mean nurses, EMTs, respiratory therapists, CNAs, and lab techs regularly work extended shifts.
- Most clinical and ancillary roles are eligible overtime.
- Hospitals may calculate overtime on an 8-hour day or 80-hour/14-day basis, and premiums paid under either method qualify for the deduction.
Tracking and Reporting
- No change to payroll withholding. The benefit is claimed by employees on Form 1040 at filing time.
- The pay is still subject to payroll taxes and remains “wages” for the purposes of FICA, FUTA, and state and local taxes.
- The provision is only a federal income-tax deduction for the employee, and state tax treatment may differ.
- For 2025 only, there is a “reasonable method” safe harbor.
- The IRS will allow any consistently applied “reasonable method” for employers to capture and document premium overtime pay.
- Isolate the premium portion of overtime pay in your time-and-attendance system and then place the figure in Box 14 or on a separate secure statement.
- In future years, a dedicated W-2 box with specific coding requirements will become mandatory for 2026, 2027, and 2028.
Action Steps
- Configure time-and-attendance to isolate the premium portion of each OT dollar.
- Document your approach and ensure your HR/payroll team are prepared to answer employee questions.
- Prepare an employee communication so staff know where to find the figure at tax time.
Please keep in mind that there will be more guidance in subsequent years, but this alert will help you navigate this new provision for Tax Year 2025.
The Bottom Line
This is not just a tax change; it will impact how you process payroll. Healthcare providers should confirm their 2025 “reasonable method,” ensure their timekeeping and payroll systems can identify the premium OT portion, and prepare for mandatory W-2 reporting starting in 2026. Taking action now will reduce compliance risk, avoid employee frustration at tax time, and prevent unnecessary strain on already overextended HR and payroll teams.
If you need further guidance or have any questions on this topic, we are here to help. Please do not hesitate to reach out to discuss your specific situation.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
