How does OBBBA treat daily overtime? (Who knows?)

The OBBBA removes tax on “qualified overtime.” You work in California, where there’s daily overtime. 

So you have more hours that "qualify" for a tax break than those chumps in Texas, right?

Hell if I know!

And as far as I can tell, your payroll company isn’t sure either.

Quick primer on how it works:

When you work overtime, you’re paid time and a half. 

So if your regular rate is $20/hour, your overtime rate is

$20 x 1.5 = $30 per OT hour

But the tax break doesn’t apply to all $30.

The OBBBA only applies to the “and a half” portion of your pay. So, for tax purposes, your overtime breaks down like this:

$20 straight time (⬅️ taxed normally)
+
($20 x 0.5) = $10 overtime premium (⬅️ qualifies for special tax treatment)

Some of the more sophisticated payroll companies actually break it out that way on your check. 

Others just lump it all together as an “OT rate.”

The second group struggled more with W2s in 2025 as they had to try to reverse engineer what wages qualified for the OBBBA rule.

Now here's where it gets weird: 

The OBBBA only applies to federal overtime, or hours worked beyond 40 hours in a week.

But Alaska, California, Nevada, and Puerto Rico have daily overtime when you work more than 8 hours in a day. (CO and OR do too, but in situations that don’t come up as much.) And what about workers in unions who get daily overtime as part of their collective bargaining agreement?

So does daily overtime count for the tax cut? 

Nobody seems to know.

Example:

Florence lives in Torrence, CA and works 4 x 10 hour shifts.

Her schedule looks like this:

Monday-Thursday 8am - 6pm broken out as

8 hours straight time
+
2 hours OT

Florence gets 8 hours of overtime in a week, 

but because she only works 40 hours, 

her hours don’t qualify under FLSA. 

So they’re NOT eligible for the tax cut.

Probably.

But what if Florence picks up a Friday shift?

Now she’s worked 50 hours in a week.

Ten of those hours were paid as overtime. 

But 8 of the OT hours were paid before she’d hit 40 hours for the week.

So are 10 hours eligible for the OBBBA tax cut?

Or only 2?

Nobody seems to know.

Least of all, the payroll companies. 

Many of them don’t even have all the data they’d need to work it out, even if they wanted to.

So they’re just... guessing.

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