“No Tax on Overtime” — Can Business Owners Benefit?

Starting in 2025, a new tax deduction is available for overtime pay — but there are important limits that small business owners need to understand.

❌ Why most owner-employees don’t qualify (the catch for S-Corp owners and officers)

• The deduction only applies to workers covered by the Fair Labor Standards Act (FLSA) — typically hourly, non-exempt employees.

• Shareholder-employees almost always fail this test, because they usually set their own pay and hours.

• Since owner-employees control their own compensation, the IRS generally won’t view their extra work as qualifying overtime.

✅ How owners can make it work

• Hire family members or staff in legitimate hourly positions (e.g. customer support, front desk, billing, operations) where extra hours are tracked and overtime is paid at a higher rate.

• Ensure these employees don’t control their own pay or schedules.

• Use a payroll system that separates base wages from overtime so records are clear and defensible.

When structured properly, the overtime portion of wages may qualify for the new deduction — potentially saving thousands in taxes.

👉 Bottom line: “No tax on overtime” is a real opportunity, but not for owner-employees paying themselves a flat salary. Success depends on careful payroll design, compliance with FLSA rules, and solid documentation.