Under the “One Big Beautiful Bill Act” (OBBBA), agricultural overtime does NOT qualify for the new federal tax deduction. This is because agricultural work is exempt from federal overtime rules according to the Fair Labor Standards Act (FLSA).
Here is a more detailed breakdown of the reason why agricultural overtime does not qualify for the deduction and what employers need to do.
What is the Overtime Deduction?
For tax years 2025 – 2028, the OBBBA allows individuals to deduct up to $12,500 of “qualified overtime compensation” (QOC) from their federal income taxes ($25,000 for married couples filing jointly). See the IRS Fact Sheet for complete details.
What is Considered "Qualified Overtime Compensation?"
QOC is overtime pay that is required by section 7 of the Fair Labor Standards Act (FLSA). See FLSA Overtime Fact Sheet #23 for more details.
Additionally, only the overtime premium portion of the overtime pay required by the FLSA would qualify for the deduction.
Why Does Agricultural Overtime Not Qualify?
Section 13 of the FLSA clearly exempts agricultural labor from the overtime requirements found in section 7. And because the bill specifically ties “qualified overtime” to the federal FLSA requirements, any overtime earned for agriculture labor is not eligible for the exemption. See DOL Fact Sheet for additional information on what duties are considered agricultural work.
Some states, including California, have passed their own laws to mandate overtime for agricultural workers. However, state-mandated overtime does not qualify for the federal deduction because the law is clear that the compensation must be required at the federal level.
In other words, the deduction only applies to overtime mandated by federal law (FLSA).
The determination of ag work is based on the duties performed in a workweek. Therefore, is could be the case that an employee could have some QOC when performing non ag work. Because of limited direction on this issue, we recommend consulting with your CPA if you have employees performing both ag and non-ag work with overtime compensation.
Transportation
Certain transportation, that is common in ag, is also excluded:
1) Transportation and preparation for transportation of fruits or vegetables, whether or not performed by the farmer, from the farm to a place of first processing or first marketing within the same State
2) Transportation, whether or not performed by the farmer, between the farm and any point within the same State of persons employed or to be employed in the harvesting of fruits or vegetables
Daily Overtime
Since state mandated law does not apply, this also means that any daily overtime wages would not qualify until the employee has gone over the FLSA 40 hour weekly threshhold.
Why Do Employers Need to Understand What Qualifies for the OBBBA Deduction?
Employers who incorrectly report state-mandated agricultural overtime as “qualified” for the deduction, risk penalties from the IRS. Employers also need to be able to explain to their employees why the actual exemption amount is different from what they see on their check stubs.
2025 Tax Reporting
The IRS has not made any changes for the 2025 W-2. The 2026 draft W-2 indicates the amounts will be reported in box 12.
For the 2025 tax year, the IRS is providing transition relief and allows for using a “reasonable method” to estimate and report these amounts.
Employers are still required to provide the “estimated” qualified overtime compensation to employees. In doing so, employees can take advantage of the deduction.
Your Input Will Help Us
There are two main areas that will require programming to handle 2025 Reporting:
How to Determine What Wages Are Non-Ag Work?
At this time, we are considering using the following parameters:
1) If the employee is reported as 941, their work will be considered non ag and qualify for the overtime deduction.
2) If the employee is reported as 943, the program would then also check a new setting at the job level to determine whether the overtime falls under ag or non-ag work.
In our research, we have found two suggestions for providing the QOC to employees:
1) Print the amount in Box 14 (used for “Other” Informational Items) of the W-2.
2) Provide a separate report and include it with the W-2.
If we program for the W-2 option, a report may still be available to provide the employee an explanation of the QOC if needed.
If you would like to provide any comments or feedback on these options, please email Hannah@DatatechAg.com.
Keep an eye out for future updates on program changes and instructions on how reporting will be handled for the 2025 tax year.