Part of last year’s One Big Beautiful Bill Act (OBBBA) was a rule eliminating federal income tax on the overtime premium portion of certain qualifying overtime wages. This change was retroactive to January 1, 2025, and is scheduled to remain in effect through 2028.
But what does this actually mean for nannies? And are nanny employers affected?
Defining “Qualified FLSA Overtime”
To benefit from this deduction, the overtime must meet the standards set by the Fair Labor Standards Act (FLSA). For household employment, this only applies when:
- The employee is a live-out employee.
- The employee works over 40 hours in a 7-day workweek.
If a live-out nanny works 45 hours, the extra 5 hours qualify as FLSA overtime. The overtime premium (the extra ‘half’ pay of their ‘time-and-a-half’ rate) for those 5 hours is now federally tax-deductible.
What Overtime is NOT Eligible?
Some forms of overtime commonly paid in household employment do not qualify for this new federal tax break. These ineligible wages include:
- Live-In Overtime: Overtime paid to employees who live in the home, even if required by state law.
- Daily Overtime: Premiums required under certain state law for working more than 8 hours in a day.
- Enhanced Premiums: Double time, holiday pay premiums, or guaranteed overtime hours that are not directly tied to FLSA-mandated hours.
An employee cannot claim the federal tax deduction on these premium payments.
How This Impacts Nannies
Employees can deduct the federal overtime premium from their gross income, reducing their tax liability.
- Deduction Limits: An employee can deduct up to $12,500 (for individuals) or $25,000 (for joint filers).
- Claiming the Benefit: The deduction will be claimed when the employee files their personal tax return (starting with tax year 2025).
- Taxes Unaffected: This deduction does not impact Social Security, Medicare, or state income taxes.
Employees who expect to earn substantial qualified overtime may want to adjust their tax withholdings now to account for a larger expected deduction when they file.
New Requirement as a Household Employer
The core payment process remains unchanged, but employers now have a new documentation duty to fulfill so employees can claim the benefit.
Employers must provide their employee with a written statement showing the total amount of FLSA overtime premiums paid during the year. They must also report this total amount to the IRS.
This amount will reported in a new, dedicated box on Form W-2, similar to how other tax-exempt benefits are currently documented.
Conclusion
The OBBBA offers a valuable new tax benefit for household employees who regularly work more than 40 hours per week. For household employers, it translates into a new documentation and reporting requirement to ensure compliance.
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If you need full- or part-time care, or just occasional babysitting, after-school care, housekeeping, or anything else in your home, let us know how we can help.
Request a service or give us a call at (518) 348-0400 and we’ll provide a free consultation to get you the care you need.