Volume 25.08
Healthcare providers of all types pay certain employees who are eligible for overtime pay. The One Big Beautiful Bill Act (“OBBBA”) has been advertised as eliminating federal income tax on overtime pay; however, employers and employees must recognize the details regarding overtime compensation and the associated tax benefits.
- The tax provisions relating to overtime are retroactive to the beginning of 2025.
- Employers will still be reporting total compensation, including overtime to the Internal Revenue Service.
- Total compensation paid, including overtime compensation to the employee will still be subject to federal income tax withholding, social security and Medicare tax withholdings, as well as the employer portion.
- Employers are required to report qualified overtime wages (wages more than the normal pay rate) on the employee’s W-2. The deduction only applies to wages paid more than the employee’s normal wage rate. In other words, an employee who earns $20 per hour normally, but $30 an hour with overtime, can deduct $10 per hour in overtime pay.
- Eligible employees may deduct up to $12,500 in qualified overtime pay as a single filer or $25,000 as a joint filer. The deduction phases out for taxpayers with income exceeding $150,000 ($300,000 in the case of a joint return). Taxpayers do not have to itemize to claim the deduction.
Yes, overtime wages are subject to Social Security and Medicare taxes. Qualified overtime compensation (just the premium paid not the normal pay) is eligible for the overtime compensation deduction on the individual’s personal federal income tax return subject to limitations described above.
Employers should be reviewing payroll records to ensure that overtime compensation is being appropriately captured in those records. If an outside payroll service is being used, communication should be occurring regarding the capture and year-end reporting of the required information.
Additionally, employers that pay overtime compensation should be communicating with employees regarding how overtime will be reported and what portion of the overtime will be eligible for the federal income reduction before calculating personal federal income tax.
HRSA ANNOUNCES 340B REBATE PILOT PROGRAM
On August 1, 2025, the Health Resources and Services Administration (HRSA), administrator of the 340B Drug Pricing Program, announced its voluntary 340B Rebate Model Pilot Program in a Notice and set forth next steps for drug manufacturers to apply to participate in the program. The program will run for at least one year and will be limited to a specific set of drugs that are part of the Medicare Drug Price Negotiation Program. Numerous drugs will be included such as those used to treat conditions like diabetes and heart failure. Drug manufacturers have until September 15, 2025, to apply to participate in the pilot rebate program. Each drug manufacturer must include a plan for how it will implement the rebate program in its application. These applications will be reviewed and approvals issued by October 1, 2025, for a January 1, 2026, effective date. While the program is voluntary for pharmaceutical manufacturers, 340B covered entities will have to participate in the program. The Notice is available here.
OIG UPDATES EXCLUDED INDIVIDUAL AND ENTITES LIST
The Office of Inspector General of the U.S. Department of Health and Human Services (“OIG”) has updated the database of currently excluded individuals and entities, referred to as the List of Excluded Individuals/Entities (LEIE”). Any healthcare provider who hires an individual or entity on the LEIE may be subject to civil monetary penalties (“CMPs”). To avoid CMP liability, healthcare providers should routinely check the list to ensure that new hires, current employees, and vendors are not the list.
We recommend that, at a minimum, new hires and new vendors be checked against the list prior to payments being made to them. This should be documented in the employee or vendor file. Additionally, we recommend that before the beginning of each year all employees and vendors be rechecked against the list and that this also be documented in the respective employee or vendor file. The updated list is available here.