Details of Public Law 119-21, section 70202 , One Big Beautiful Bill Act

This provision would allow a deduction of an amount equal to qualified overtime compensation received during the taxable year, not to exceed $12,500 ($25,000 for married filing joint), for taxable years beginning on or after December 31, 2024, and before January 1, 2029. Qualified overtime must be reported on information returns and statements furnished to the taxpayer. The deduction is reduced by $100 for each $1,000 by which the taxpayer’s modified adjusted gross income (MAGI) exceeds $150,000 ($300,000 in the case of a joint return). This provision also allows this deduction in addition to the standard deduction for taxpayers who do not itemize.

This provision defines “qualified overtime compensation” as overtime compensation paid to an individual as required under section 7 of the Fair Labor Standards Act of 1938 that exceeds the regular rate of paid to the employed individual. Qualified overtime compensation does not include any qualified tips.

This provision requires a valid social security number (SSN) to be provided on the tax return to claim the deduction. An omission of the correct SSN on the return is treated as a math or clerical error. Additionally, in the case of a married individual, they must file a joint return to claim the deduction.

This provision requires information reporting by employers to the Secretary of the Treasury and to the employee on the amount of overtime compensation paid to the employee on W-2. Additionally, payors must provide this information to non-employees on Form 1099. The Secretary is required to modify the withholding calculations to include the new deduction.

California conforms, under the PITL, to the definition of taxable income under IRC section 63, as of the specified date of January 1, 2025, with modifications. California does not conform to the federal standard deduction amounts but instead has its own standard-deduction law. Nonresidents and part-year residents are allowed a standard deduction as modified by the ratio that California AGI bears to total AGI (not to exceed 100 percent). California generally conforms, under the PITL, to additional itemized deductions, as of the specified date of January 1, 2025, with modifications. The changes made to federal law by this provision were added after January 1, 2025. As a result, California does not conform to the deduction for the overtime paid.

Under the Administration of Franchise and Income Tax Law (AFITL), the Franchise Tax Board (FTB) may require a copy of any information return required to be filed with the Secretary of the Treasury, at the time and in the form and manner as the FTB may, by forms and instructions, require. As a result, California would conform to the changes requiring the information return related to the amount of overtime compensation paid to the employee on W-2.

Additionally, under the AFITL, FTB treats specified errors identified on the return during processing as math errors, which includes not providing a valid identification number as required to claim a dependent exemption tax credit, earned income tax credit, young child tax credit, or foster youth tax credit. California doesn’t conform to the definition of mathematical or clerical error under IRC section 6213. As a result, California does not conform to the changes made by this provision related to IRC section 6213.

Annually, FTB is required to provide the EDD with wage withholding tables to be used by employers to withhold taxes on wages paid to their employees. The tables are based on the estimated amount of tax due on the wages paid by the employer. FTB does not conform to the requirement to modify withholding calculations under IRC section 3402.

The estimated revenue impact to conform to the above federal provisions would result in the following loss:

26/27 27/28 28/29 29/30 ($2,000,000,000) ($1,100,000,000) ($440,000,000) $0