Accountants love numbers, and the IRS loves acronyms. So, when the One Big Beautiful Bill Act was signed into law on July 4, 2025, it didn't take long for it to earn a nickname: OB3. It's a massive legislative package — over 900 pages — that touches everything from permanent tax cuts to brand-new deductions most Americans have never had to think about before.
Our goal today is to demystify the provisions that matter most for government employers and their employees. We'll focus on the new no-tax-on-overtime provision, updated 1099 reporting thresholds, and some of the other headline deductions in the bill. And for those of you managing fire, police, or EMS personnel, there's a specific section you're going to want to read carefully.
Signed on July 4, 2025, the OB3 is a sweeping 2025 legislative package that makes the individual income tax rates from the 2017 Tax Cuts and Jobs Act permanent. Its stated aim is to increase take-home pay for working families, and it does so through several major provisions — while funding those cuts through significant reductions to Medicaid and SNAP food assistance.
The bill is over 900 pages. If GASB 103 is the light reading of the government accounting world at under 12 pages, OB3 is decidedly the opposite. But the good news is you don't need to read all of it. Here's what you do need to know.
The OB3 permanently extends the individual income tax rates that were set to expire in 2025 and doubles the standard deduction that was originally established under the 2017 TCJA. This is now permanent law, not a provision that needs to be renewed.
The tips deduction allows eligible employees to deduct up to $25,000 per taxpayer per year for qualified tips received. A few important details:
This is the provision with the most significant operational impact for government employers, and we'll spend more time on it below. The deduction is $12,500 for individual filers and $25,000 for joint filers on qualified overtime compensation as defined under Section 7 of the Fair Labor Standards Act (FLSA).
Phase-outs apply: the deduction reduces by $100 for every $1,000 of modified adjusted gross income above $150,000 for individuals and $300,000 for joint filers. Like the tips deduction, it's available to both itemizers and non-itemizers, requires a valid Social Security number, and married filers must file jointly.
A new deduction of up to $10,000 of interest on car loans for new personal-use passenger vehicles with final assembly in the United States. Key conditions:
A new above-the-line deduction of $6,000 per taxpayer age 65 or older, effective for tax years 2025 through 2028. Phase-outs begin at $75,000 for single filers and $150,000 for joint filers. This replaces the original proposal to eliminate taxation on Social Security benefits entirely, which did not survive the budget reconciliation process.
The Child Tax Credit is permanently extended and increased to $2,200 (up from $2,000), indexed for inflation going forward. The refundable portion is $1,700 for 2025 and will also be indexed. The $500 credit for other dependents is permanently extended but is not indexed for inflation. Both the child and at least one parent must have a Social Security number.
A new pilot program for U.S. citizens born between January 1, 2025, and December 31, 2028. The federal government will contribute $1,000 per child into each eligible account. No contributions may be made until July 4, 2026 — one year from the date of enactment. Key features:
The 1099 reporting threshold has been set at $600 for decades. Starting with tax year 2026, it increases to $2,000 for most payments — a change designed to significantly reduce the compliance burden for businesses.
This will meaningfully reduce the number of 1099s many organizations need to file each year.
Let's dig into the provision that's going to require the most operational change for most government employers: the no-tax-on-overtime deduction. The word to hold onto throughout this entire section is 'qualified.' Not all overtime is qualified overtime under this provision.
Qualified overtime compensation refers specifically to the extra half-time premium portion of overtime pay — the 0.5 multiplier in time-and-a-half required by the FLSA. It is not the full overtime payment, and it is not overtime paid under state laws or collective bargaining agreements that exceed FLSA standards. It's the FLSA-mandated half portion only.
Here's how to think about it: if an employee earns $20 per hour, their overtime rate is $30. Only the $10 premium above the regular rate — the half-time portion — is the qualified overtime amount. A quick shortcut: divide the total overtime pay by three to get the 0.5 portion.
This deduction only applies to federal income tax. It does not exempt overtime from FICA — Social Security and Medicare taxes still apply in full.
Qualified overtime is available to non-exempt employees only — those entitled to overtime under FLSA Section 7. Non-exempt employees are typically hourly-paid workers: clerical staff, retail employees, food service workers, warehouse and manual laborers, and first responders including police, firefighters, and paramedics.
Exempt employees — higher-compensated executives, managers, professionals such as accountants, engineers, teachers, and administrators — are not eligible for this deduction.
Let's walk through how the calculation works in practice.
Example 1 — Standard workweek: An employee works 45 hours during a Sunday-to-Saturday seven-day work period and earns $20 per hour. That's five hours of overtime at $30 per hour, totaling $150 in overtime pay. The qualified overtime is $150 divided by three, which equals $50.
Example 2 — Double time complicates the calculation: An employee works 50 hours in the same type of work period at $20 per hour, but eight of those overtime hours were paid at double time for working Saturday. She received $380 in overtime pay total. The qualified overtime is based only on the FLSA-mandated time-and-a-half rate — double time hours are not subject to the qualified overtime calculation. So: 10 total overtime hours at $30 per hour equals $300. Divide by three for the 0.5 portion: $100 of qualified overtime.
Example 3 — Fire protection under the FLSA 7K: A firefighter employed by a public agency works 245 hours in a 28-day work period at $50 per hour. Under the FLSA 7K exemption, the overtime threshold for fire protection personnel on a 28-day cycle is 212 hours. So, 245 minus 212 equals 33 overtime hours. At the $75 overtime rate, that's $2,475 in total overtime. The qualified 0.5 portion is $825.
For government entities with fire protection and law enforcement personnel, the FLSA 7K provision is critical to understand because it changes how and when overtime is calculated.
The following government employees are generally eligible for the 7K exemption:
Under the standard 40-hour workweek rule, overtime kicks in after 40 hours. Under 7K, the overtime threshold is set on a work period basis — not a workweek — ranging from 7 to 28 consecutive days. The thresholds on a full 28-day cycle are 212 hours for fire protection personnel and 171 hours for law enforcement personnel.
For shorter work periods, those thresholds are reduced proportionately. For example, on a 14-day cycle, fire protection personnel are owed overtime after 106 hours, while law enforcement must receive overtime after 86 hours.
One important distinction to note: a work period is not the same as a pay period. You could have a 21-day or 28-day work period while still paying employees every two weeks. Your work period policy should be documented.
In our polling during the session, just over half of respondents said they have a defined work period policy in place for fire and law enforcement personnel. If you don't have one, establishing it should be on your near-term to-do list.
A common question: how does comp time factor in? If an employee earns comp time and later uses it as leave — essentially treating it as paid time off — that time does not qualify as worked hours and is therefore not subject to overtime or the qualified overtime deduction. If, however, comp time is paid out, the same 0.5 calculation applies to the paid-out amount.
Here's the critical compliance piece: in 2025, there was transitional relief on W-2 reporting because employers and payroll software developers simply didn't have enough time to build the required tracking and codes into their systems. In 2026, that relief is gone.
Starting with the 2026 W-2:
Failure to report qualified overtime correctly can result in penalties under the information return penalty structure, ranging from $60 to $680 per return depending on whether the filing was late, more than 30 days late, or not filed at all. Those penalties add up quickly.
The 2026 reporting deadline is closer than it feels. Here's what we recommend:
If you have questions about how these provisions apply to your organization, reach out to your Brown Edwards contact. This is new territory for everyone, and we're here to help you navigate it.