You've probably heard about the new "no tax on overtime" rule. Here's what it actually means for your nanny — and for you as the employer.
The One Big Beautiful Bill Act (OBBBA) is a federal tax law signed in July 2025 that created new deductions for overtime pay and tips. Under the no tax on overtime provision, your nanny can deduct the premium portion of their overtime pay from federal income taxes — up to $12,500/year. It applies to tax years 2025 through 2028, and it could save your nanny hundreds of dollars per year.
Here's how it works, who qualifies, and what (if anything) you need to do differently.
What Is the "No Tax on Overtime" Rule?
The OBBBA allows employees to deduct the premium portion of their overtime pay from their federal taxable income. In plain English: the extra half of "time-and-a-half" can be deducted on their tax return.
Here's how that breaks down for a nanny earning $20/hour:
| Pay Type | Hours | Rate | Gross Pay | Deductible? |
|---|---|---|---|---|
| Regular time | 40 hrs | $20/hr | $800 | No |
| Overtime (base) | 5 hrs | $20/hr | $100 | No |
| Overtime (premium) | 5 hrs | $10/hr | $50 | Yes |
The $50 premium — the "half" of time-and-a-half — is what your nanny can deduct. Over a full year, that adds up.
Annual savings example
If your nanny works 45 hours/week at $20/hour:
- Weekly overtime premium: 5 hrs × $10 = $50
- Annual overtime premium: $50 × 52 = $2,600
- Tax savings at 22% bracket: ~$572/year
That's real money for your nanny — and it costs you nothing extra. Use our nanny tax calculator to see the full breakdown for your situation.
Does This Affect Your Employer Taxes?
Short answer: No. This is entirely an employee-side tax deduction. Here's what stays the same for you:
- FICA (Social Security + Medicare): Still owed on all wages, including overtime. The deduction only applies to federal income tax — not payroll taxes.
- FUTA: Still owed on the first $7,000. (You report this on Schedule H.)
- State unemployment (SUTA): Still owed per your state's rules.
- How you calculate payroll: No changes. You still pay time-and-a-half for hours over 40.
The only thing that changes is a new reporting requirement on the W-2 (more on that below).
Who Qualifies for the Overtime Deduction?
Not every nanny qualifies. Here's what the IRS requires:
Must be FLSA overtime-eligible
The deduction only applies to overtime required by the Fair Labor Standards Act. Your nanny qualifies if they:
- Are a non-live-in household employee
- Work more than 40 hours in a 7-day workweek
- Are paid at least 1.5× their regular rate for those extra hours
Live-in nannies do NOT qualify
This is the biggest exception for household employers. Under the FLSA, live-in domestic workers are exempt from overtime requirements. Even if you voluntarily pay your live-in nanny overtime, it doesn't qualify for this deduction because the FLSA doesn't require it.
Important: Some states (California, New York, New Jersey, Hawaii, Massachusetts, Minnesota, Maryland, Nevada, Oregon) require overtime even for live-in domestics. But state-mandated overtime doesn't count for this federal deduction — it must be FLSA-required.
For the full picture on how taxes differ for live-in nannies — room and board, overtime, FICA — see our live-in nanny tax guide.
Income limits
The deduction phases out for nannies with modified adjusted gross income (MAGI) above:
- $150,000 for single filers
- $300,000 for married filing jointly
Most nannies fall well below these thresholds, so the phase-out rarely applies.
Dollar cap
The maximum deduction is $12,500/year ($25,000 for joint filers). For most nannies, their total overtime premium won't reach this cap.
What You Need to Do as the Employer
You have one new obligation: report your nanny's qualified overtime compensation on their W-2 (or a separate statement for 2025). Everything else about payroll stays the same.
For tax year 2025 (W-2s issued January 2026)
If your nanny worked overtime in 2025, you should provide them a separate written statement showing their total qualified overtime compensation for the year. The IRS granted transition relief for 2025, so this information can go in Box 14 of the W-2 or on a separate document — formal W-2 reporting isn't required yet.
If you already issued 2025 W-2s without this information, don't panic. The IRS has waived penalties for 2025 reporting. You can provide a separate statement to your nanny anytime.
For tax year 2026 and beyond (W-2s issued January 2027)
Starting with 2026 W-2s, you'll need to report qualified overtime compensation in Box 12 using code TT. This is the premium portion only — not total overtime pay.
Here's what goes in Box 12:
| Box 12 Code | What to Report | Example (5 OT hrs/week × 52 weeks at $20/hr) |
|---|---|---|
| TT | Qualified overtime premium | $2,600 ($10/hr premium × 5 hrs × 52 weeks) |
How to calculate it: For each pay period, take the overtime hours × (overtime rate − regular rate). That gives you the premium portion. Total it for the year.
Don't want to track this manually? NannyKeeper calculates the qualified overtime premium automatically every time you run payroll — and includes it on your nanny's W-2 with the correct Box 12 code TT. Start tracking free →
What Doesn't Qualify
A few common situations that don't count:
| Situation | Qualifies? | Why Not |
|---|---|---|
| Live-in nanny working 50 hrs/week | No | Live-in domestics are FLSA overtime-exempt |
| Nanny working 38 hrs one week, 42 the next | Only the 42-hr week | Must exceed 40 hrs in a single workweek |
| State-only overtime (e.g., CA daily OT) | No | Must be FLSA-required, not just state-required |
| Holiday premium pay | No | Not FLSA-required overtime |
| Voluntary overtime bonus | No | Must be the FLSA-required 1.5× rate |
How Your Nanny Claims the Deduction
Your nanny claims this deduction on their personal tax return — you don't do it for them. Here's what they need:
- Your W-2 (or written statement for 2025) showing the qualified overtime amount
- Schedule 1-A of their Form 1040 — the deduction goes on Part III ("No Tax on Overtime")
- They don't need to itemize — this is a separate deduction available to everyone (note: it does not reduce AGI)
If your nanny uses tax software (TurboTax, H&R Block, etc.), the software should handle this automatically once they enter their W-2 information.
How NannyKeeper Handles This for You
You don't need to track overtime premiums in a spreadsheet or figure out Box 12 codes yourself. If you use NannyKeeper for payroll:
- Overtime is calculated automatically — enter hours worked, and we calculate regular pay, overtime pay, and the qualified premium portion
- Every paycheck is documented — pay stubs break out regular and overtime hours (which matters if the IRS ever asks)
- W-2s include Box 12 code TT — we generate your nanny's W-2 with the qualified overtime amount already filled in
- For 2025, we provide the written statement — covering the transition year before formal W-2 reporting kicks in
The whole point is that you don't need to understand the details of FLSA premium calculations or W-2 box codes. You just enter hours, and we handle the rest.
Get started free → — free payment tracking, full payroll from $10/mo.
When Is Your Nanny Entitled to Overtime?
The no tax on overtime deduction depends on FLSA overtime rules. Here's a quick summary of when your nanny is entitled to overtime pay:
Federal rules (FLSA)
- Non-live-in nannies: Entitled to 1.5× their regular rate for hours over 40 per week
- Live-in nannies: Exempt from overtime under federal law (but some states override this)
- Casual babysitters: Exempt from FLSA entirely
State rules that go further
Some states have stricter overtime requirements than the FLSA:
| State | Additional Overtime Rules |
|---|---|
| California | Daily overtime after 8 hours; double time after 12 hours (applies to live-in domestics too) |
| Hawaii | Overtime applies to live-in domestic workers |
| Maryland | Overtime applies to live-in domestic workers |
| Massachusetts | Overtime applies to live-in domestic workers |
| Minnesota | Overtime applies to live-in domestic workers |
| Nevada | Overtime applies to live-in domestic workers |
| New Jersey | Overtime applies to live-in domestic workers |
| New York | Overtime applies to live-in domestic workers |
| Oregon | Overtime applies to live-in domestic workers |
Remember: Only the federal FLSA-required portion qualifies for the deduction. State-only overtime does not.
Check your state's specific requirements →
FAQ
Does "no tax on overtime" mean my nanny pays zero tax on overtime?
No. The name is misleading. Your nanny can deduct the premium portion (the "half" of time-and-a-half) from federal income tax — up to $12,500/year. Social Security and Medicare (FICA) taxes still apply to all overtime wages. State income tax may also still apply — most states have not adopted this deduction.
Do I need to change how I run payroll?
No. You still calculate and pay overtime the same way. The only change is a new reporting requirement: provide a written statement of qualified overtime for 2025, and report it in Box 12 (code TT) on 2026 W-2s.
Does this deduction apply to live-in nannies?
No. Live-in domestic workers are exempt from FLSA overtime requirements, so their overtime pay doesn't qualify — even if you voluntarily pay them time-and-a-half. Some states require overtime for live-in domestics, but state-mandated overtime doesn't qualify for this federal deduction.
Does my nanny's state honor this deduction?
Probably not yet. The no tax on overtime deduction is a federal income tax deduction only. Most states have not adopted it, meaning your nanny's overtime pay is still subject to state income tax in most cases. Check your state's requirements for specifics.
How long does this deduction last?
The deduction applies to tax years 2025 through 2028. Unless Congress extends it, it expires after 2028.
Does this change my employer tax obligations?
No. You still owe 6.2% Social Security and 1.45% Medicare on all wages including overtime. FUTA and SUTA are unchanged. This deduction only reduces your nanny's federal income tax liability — it has no effect on your employer costs.
What if I already issued my nanny's 2025 W-2 without overtime information?
The IRS granted penalty relief for 2025. You can provide a separate written statement to your nanny showing their qualified overtime compensation for the year. This can be a simple document — it doesn't need to be on the W-2 itself.
Can a salaried nanny benefit from this deduction?
It depends. If your nanny is salaried but non-exempt under the FLSA (most nannies are non-exempt), and they work more than 40 hours/week, the overtime premium portion can still qualify. You'll need to calculate the implied regular hourly rate from the salary and show the overtime premium separately. Pay stubs that break out regular and overtime hours are important.
Should I give my nanny more hours so they get the deduction?
That's between you and your nanny. The deduction makes overtime slightly less costly for them (they keep more of it), but you still pay the full time-and-a-half rate plus your employer FICA share. Use our calculator to run the numbers first.
Can my nanny reduce their withholding because of this deduction?
Not automatically. The deduction is claimed on their tax return, not through payroll withholding. However, your nanny can update their W-4 to reduce withholding if they expect to claim the deduction. See IRS guidance on updating W-4 withholding.
New to nanny taxes? Start with our complete guide to nanny taxes for the basics.
Need to file a W-2? See our W-2 guide for household employers — including how to handle Box 12 code TT.
What else changed in 2026? See all the nanny tax changes for 2026, including the new $3,000 threshold.
Wondering what you owe? Try our free nanny tax calculator to see the full picture — overtime and all.