Automobile dealerships might be surprised by some important nuances in the “No Tax on Overtime” rules that rolled out nationwide last year, and now is the time to get familiar with the fine print. The new federal tax rules are surrounded by misconceptions and, in many instances, are more complicated for employers in the retail automotive industry. We’ll break it all down and give you the top employer takeaways and next steps.

Quick Overview

The One Big Beautiful Bill Act (OBBBA), which President Trump signed into law last year, includes a new federal income tax deduction related to overtime pay. This new rule (which applies for tax years 2025 through 2028):

• Allows an eligible worker to take a deduction on their individual tax return of up to $12,500 (or $25,000 if married filing jointly) in “qualified overtime compensation” they received during the applicable tax year; and
• Imposes new filing and information reporting requirements on employers related to such qualified overtime compensation.

Under the OBBBA, “qualified overtime compensation” means overtime compensation (excluding qualified tips) paid to an individual that:

• Is required by federal law — specifically, under section 7 of the Fair Labor Standards Act (FLSA); and
• Exceeds the individual’s “regular rate” as determined by the FLSA.

Is “No Tax on Overtime” a Misnomer?

Sort of. There are plenty of misconceptions floating around related to the OBBBA’s “No Tax on Overtime” provisions. The main one is that all overtime pay provided to any employee is subject to the deduction. As just referenced, only qualified overtime pay is subject to the deduction — i.e., that which is paid in accordance with the FLSA.

Employers throughout the country are required to comply with a myriad of federal, state and local laws governing the payment of wages. As a general rule, whenever these laws differ, employers are required to comply with the one that is the most favorable to an employee in any given situation or work week. Several states and localities have developed their own sets of laws governing overtime that are more favorable than the rules set forth in the FLSA. In those states, a significant question is whether the “overtime” paid pursuant to those non-federal laws falls within the deduction.

Thankfully, Louisiana is not one of those states with a separate set of overtime laws. Here, employers are governed solely by the FLSA with respect to overtime, minimum wage and recordkeeping requirements. Nevertheless, it is important to ensure that you have a good understanding of what constitutes “overtime” under the FLSA. Just because an employer pays an amount for overtime does not render the payment as overtime “required by” the FLSA.

In the Dealership Setting, Who Is “Required” To Receive Overtime Under the FLSA?

Dealerships — like other employers — will have several salaried employees who are exempt from overtime (and minimum wage and recordkeeping requirements) under the “white collar” exemptions found in the FLSA. These exemptions apply to those who are paid on a salary basis above the minimum threshold and perform duties that qualify as “executive,” “administrative” and/or “professional.” In a typical dealer group, these exemptions will generally apply to the general manager, department and sub-department heads, office managers, controllers and human resources managers.

Additionally, the FLSA contains several dealer-specific exemptions. These exemptions apply to technicians, service advisors, finance managers, parts counter and warehouse personnel, and sales representatives. There is also an exemption for employees who are paid primarily on a commission basis, provided that they receive at least 1.5 times the federal minimum wage. Unlike the “white collar” exemptions, these are partial and apply only to overtime. Employees in these positions still must be paid at or above the federal minimum wage for all hours worked, and accurate time records must be maintained for them.

The remainder of dealership employees are typically non-exempt under the FLSA and must receive overtime for all hours worked in a work week. These individuals generally include porters, receptionists, cashiers, warranty clerks/administrators, detailers, hourly lube techs, BDC representatives, payroll clerks, accounts payable and receivable clerks, and other non-managerial office staff. It is not legal under the FLSA to simply pay these individuals a salary and not compensate them for overtime hours. In addition to violating the FLSA, such a practice could now also create issues under the tax laws as you will be effectively denying your non-exempt employees’ right to the deduction because you failed to pay them overtime. 

This is a good time to review your pay practices to make sure that you are keeping time records for and paying overtime to all employees who are non-exempt. Only overtime payments provided to your non-exempt staff will qualify for the tax deduction. Consequently, if you elect to pay overtime to an exempt employee when you are not required to do so, there is a good chance that the IRS will reject the deduction when submitted by the employee. 

Employer Impact and Next Steps

While the OBBBA’s new overtime deduction is a tax benefit for employees filing individual tax returns, it impacts employers in several important ways:

• New Filing and Information Reporting Requirements: The OBBBA requires employers to include the total amount of “qualified overtime compensation” on the employee’s Form W-2. Properly tracking, calculating and reporting these amounts may be challenging and burdensome for auto dealerships, particularly those that operate in multiple states. For the 2025 taxable year, the IRS is granting employers penalty relief related to failures to separately report qualified overtime compensation. This relief will not be available for the 2026 tax year or future years, so it is important that dealers correctly calculate and report qualified overtime compensation.
• Payroll Withholding: All overtime pay remains subject to payroll taxes and withholding requirements (although employees may opt to adjust their Forms W-4 to reflect any expected deductions for qualified overtime compensation). Dealers must be aware of their withholding obligations in light of the new tax rules for qualified overtime compensation and look out for any employee updates to Forms W-4. Please work with your CPA on this front.
• Employee Relations: Some employees might be motivated to work more overtime hours based on the OBBBA’s new overtime deduction, and employers should be prepared to respond to any employee confusion — and perhaps hard feelings — related to any misconceptions surrounding it. As a general rule, you should avoid giving employees any tax planning advice and remind them that the dealership is following IRS rules.

Conclusion

There certainly is much more than meets the eye in connection with the seemingly straightforward “no taxes on overtime” rules. All employers should work with counsel and their certified professional accountants on filing, reporting and withholding issues, as well as employee communications, related to qualified overtime compensation. This is particularly true for auto dealers since industry-specific issues will likely make compliance more challenging.