OBBBA Compliance: What Healthcare Providers Need to Know About Qualified Overtime Reporting

The One Big Beautiful Bill Act signed into law on July 4, 2025 introduced a tax benefit that sounds simple: employees can deduct a portion of their overtime compensation from federal taxable income. But for healthcare providers already running complex payroll and workforce management environments, this is not a tax policy discussion. It’s a systems readiness problem.

If your organization hasn’t already started capturing qualified overtime data, you’re behind. The provision is retroactive to January 1, 2025.

What the Law Actually Requires

Employees may deduct up to $12,500 per year ($25,000 for married filing jointly) of qualified overtime compensation through tax year 2028. The catch is in what qualifies.

Only the FLSA-mandated overtime premium counts. That’s the amount paid in excess of the regular rate—the “half” in “time and a half.” The base pay portion of overtime hours does not qualify.

Employers must provide employees with an annual statement reflecting their total qualified overtime compensation. The IRS has granted transition relief for 2025, but that relief assumes you can actually determine and substantiate these amounts when asked.

Why Healthcare Faces Additional Complexity

Healthcare organizations face distinct operational challenges when implementing OBBBA’s overtime reporting requirements.

First, overtime is operationally essential in healthcare. Unlike industries that can simply reduce overtime, health systems rely on it to maintain safe staffing levels and continuous patient care. As employees recognize the tax advantage associated with qualified overtime, some organizations may see increased willingness to accept overtime shifts—which means more qualifying transactions requiring accurate tracking.

Second, healthcare payroll environments tend to be complex. Multiple pay rules, shift differentials, union contracts, and state-specific overtime regulations create layered calculation requirements. Adding FLSA-specific premium tracking on top of existing complexity requires careful system configuration.

The System Gaps You’re Likely Facing

Most payroll and workforce management platforms were not designed with OBBBA-style reporting in mind. The gaps tend to cluster in predictable places.

Payroll System Questions

Can your system distinguish between regular pay (1.0x) and the FLSA overtime premium (0.5x) for every overtime hour? Can it accumulate year-to-date qualified overtime at the employee level? Can it produce an annual statement showing total qualified overtime compensation and support auditability?

Here’s the practical test: If an employee earning $20/hour works 10 overtime hours, can your system clearly identify that $100 of overtime premium (10 × $10) is qualified while the $200 base portion (10 × $20) is not?

Workforce Management Questions

Can your timekeeping system identify FLSA-mandated overtime separately from overtime driven by state law, union agreements, or employer policy? Can it differentiate daily overtime from weekly FLSA overtime? Does overtime classification pass cleanly to payroll without manual intervention?

Integration Questions

Do your systems exchange overtime data seamlessly? Are employee and pay-code definitions consistent across platforms? Can employees see their year-to-date qualified overtime amounts?

If the answer to any of these is “no” or “I’m not sure,” you have exposure.

What to Do Now

Immediate Actions (Already Overdue)

Because the provision is retroactive to January 1, 2025, organizations should already be capturing data for the current tax year.

Audit your payroll pay codes to confirm overtime calculations clearly separate base pay from the FLSA-required premium. Document your calculation methodology—the IRS allows reasonable approximation methods for 2025, but those methods must be documented and consistently applied. Assess whether your systems need configuration changes, enhancements, or longer-term platform upgrades.

By Early 2026

Treat 2026 as a clean-slate year. Implement reliable year-to-date accumulators for qualified overtime. Configure employee reporting via W-2 Box 14 or supplemental statements. Build exception reporting to detect miscoded overtime before it impacts accuracy. Stabilize integrations so workforce management passes correctly classified overtime to payroll without manual rework.

Looking Ahead

Consider showing year-to-date qualified overtime in self-service portals to reduce employee inquiries. Evaluate whether targeted overtime opportunities can help address staffing challenges. Develop a system roadmap if manual workarounds are your current approach—they don’t scale.

The Timeline

• January 1, 2025 – Overtime provisions took effect (retroactive)
• Tax Year 2025 – Transition year with penalty relief and reasonable approximation allowed
• January 1, 2026 – Expectation of full, precise tracking for 2026 wages
• Early 2026 – System updates, testing, and employee communications should be complete
• December 31, 2028 – Overtime deduction provisions sunset under current law

The Bottom Line

OBBBA’s overtime provisions may appear straightforward, but for healthcare providers they expose weaknesses in how overtime is captured, calculated, and communicated across systems.

Organizations treating this solely as a tax change will scramble at year end. Those recognizing it as a systems and data-readiness initiative will protect compliance, reduce administrative burden, and support their workforce through the transition.

Need help assessing your payroll and workforce system readiness for OBBBA compliance? Contact Healthcare IT Leaders to discuss how we can support your organization’s operational and technical preparation.

TALK TO our team

Disclaimer: This article is intended to provide factual information about the operational and technical requirements of OBBBA’s overtime provisions. The content reflects Healthcare IT Leaders’ consulting perspective on systems readiness and compliance preparation, not political commentary or policy positions.