Restaurant overtime Under the One Big Beautiful Bill Act

Bill Clark • July 17, 2025

Overtime Pay for Restaurants Under the OBBBA



The One Big Beautiful Bill Act (OBBBA) was signed into law on July 4, 2025—and it directly affects your restaurant’s payroll policies. This federal legislation includes a temporary federal income tax exclusion for qualifying overtime pay, which applies retroactively to January 1, 2025, and remains effective through December 31, 2028.


🔹 Federal Income Tax Exclusion for Overtime Pay – What Qualifies?

Under OBBBA, only the federally mandated overtime premium portion—the extra compensation paid for hours worked beyond 40 per week under the Fair Labor Standards Act (FLSA)—is excluded from federal income tax. This typically refers to:

  • Time-and-a-half pay (1.5× the regular rate) for hours worked over 40 in a workweek.


 Important: What Counts — and What Doesn’t

 

  Regular hourly wages

 ❌ No

 Regular earnings are still fully taxable


 FLSA-mandated overtime (1.5×)

 ✅ Yes

 This is the core amount the law targets


 Double time (2×)

 ⚠️ Partially

 Only up to the 1.5× portion qualifies; the extra 0.5× is taxable


 State or contractual OT

 ❌ No

 Additional OT pay required by state law or employer policy is taxed.

 

In summary, only the 1.5× premium portion required by FLSA is exempt from federal income tax. If your business pays double time for holidays or extended hours (2.0× regular rate), only the first 1.5× above the regular rate qualifies, and the remainder is treated as fully taxable income. In regards to State-Specific or Employer-Defined Overtime, if your restaurant provides overtime pay not required by federal law (e.g., overtime for shifts longer than 8 hours, double time on Sundays, etc.), that portion is not excluded from federal income tax under this provision.

 


🔹 Payroll Reporting Implications

Employers must separately track and report qualifying overtime premiums on Form W-2, beginning in tax year 2025. For this initial year, the IRS will allow employers to use reasonable estimates if their payroll system did not break out the overtime premium portion beginning January 1.


We recommend:

  • Verifying your payroll system can distinguish the FLSA overtime premium (e.g., the 1.5×) from base pay and any additional bonuses or premium pay.
  • Separately classifying state-mandated or policy-based double time so it is not inadvertently reported as tax-exempt.
  • If you use restaurant-focused payroll software or a third-party processor, we strongly recommend verifying that these updates are being incorporated correctly.


🔹 Action Steps for Restaurant Owners & Managers

 Task

    Review time-tracking practices

 To ensure overtime premiums are correctly split from base wages

   Audit payroll system configurations

 Most systems do not currently break out the 0.5× FLSA premium

   Educate management & payroll team

 Shift leads and GMs need to understand the tax impact of how hours are scheduled

   Prepare to update W-2 reporting

 Employers are responsible for providing accurate breakdowns starting 2025

 

🔹 We're Here to Help

We are monitoring IRS guidance closely and will notify you once the agency releases additional details. In the meantime, we are available to assist with:

  • Reviewing your overtime policies for compliance
  • Configuring your payroll system for new reporting requirements
  • Planning year-end W-2 adjustments or corrections if needed
  • Drafting communications to employees about how these changes affect their pay


Please use our contact us page if you’d like to set up a consultation.