Key Points

• No Tax on Overtime law allows eligible employees to deduct premium overtime pay from federal income taxes for tax years 2025–2028.
• Only FLSA-required overtime qualifies; employees exempt from the Fair Labor Standards Act overtime rules cannot claim the deduction.
• Many auto dealership employees are exempt from overtime under salaried "white collar" exemptions or auto industry-specific exemptions, making them ineligible.
• Auto industry-specific exemptions cover salespeople, parts department workers, technicians, service advisors, and certain commissioned employees who spend 50% or more of their time in those roles.

The Overtime Tax Break

The "No Tax on Overtime" law — enacted as part of the One Big Beautiful Bill — allows eligible employees to deduct a portion of their overtime pay from their federal income taxes from 2025 through 2028.

Many auto dealership employees, however, will not be able to use the deduction. This is because they are exempt from overtime as a salaried or “white collar” worker or because they are exempt under rules specific to the auto industry. Whatever the reason, if a worker is exempt from overtime, this new tax benefit will not apply to them.

Below, we explain which employees may qualify, the exemptions specific to the auto industry, and what dealers should know to help their teams navigate these changes.

What Is the New Overtime Tax Deduction?

For tax years 2025–2028, employees who earn "qualified overtime compensation" under the Fair Labor Standards Act (FLSA) may deduct the premium portion of their overtime pay — generally, the extra “half’ of time-and-a-half wages.

Only overtime that the FLSA requires is eligible to be deducted. An employee who is already exempt from FLSA overtime does not qualify for this deduction.

Who Is Exempt from Overtime?

Many dealership employees are exempt from overtime — meaning they do not receive premium overtime pay and therefore cannot claim this deduction. Common exemptions applicable to dealership employees include:

Salaried "White Collar" Employees
(minimum $684/week):

• Administrative Exemption: Employees performing office or non-manual work related to dealership operations who use discretion and independent judgment—such as assistant managers, office managers, and HR personnel.
• Executive Exemption: Those who manage the dealership or a department, direct two or more employees, and have hiring or firing authority—such as department managers and shop foremen.
• Professional Exemption: Employees performing work requiring advanced specialized knowledge, such as in-house attorneys or accountants.
• Highly Compensated Exemption: Office workers earning over $107,432 annually who regularly perform at least one duty of an exempt executive, administrative, or professional employee.

Auto Industry-Specific Exemptions
(no salary requirement, but employees must spend 50% or more of their time in one of the following capacities):

• Salespeople: Those who sell or obtain orders for vehicles.
• Parts Department Workers: Those who order, stock, pull, and sell parts (not delivery drivers).
• Technicians: Mechanics performing skilled work such as service, reconditioning, and body shop repairs.
• Service Advisors: Exempt under federal law per a 2018 Supreme Court ruling.
• Commissioned Employees: Exempt if their regular rate exceeds 150% of minimum wage and more than half of their pay over at least one month comes from commissions.

What Do Dealers Need to Do Moving Forward?

For 2025, dealer-employers are not required to separately report qualified overtime compensation on W-2 or 1099 forms. Starting in 2026, however, separate reporting will be mandatory, and tax forms will be updated accordingly.

For now, employees should use pay stubs or other documentation to calculate their eligible amounts and consult their own tax advisors. The IRS has published a Fact Sheet with additional guidance.

What Should Dealers Do Now?

Review job descriptions and duties to confirm that your employees are properly classified.

Employees who are non-exempt and receive FLSA-required overtime may be able to claim this new tax benefit — encourage them to speak with their tax advisors for personalized guidance.

If you have questions about this alert, please contact Seth L. Dobbs at sdobbs@foxrothschild.com, Joseph S. Aboyoun at jaboyoun@foxrothschild.com, Grant C. Baker at gbaker@foxrothschild.com or any member of Fox Rothschild's Automotive Practice Group.

This information is intended to inform firm clients and friends about legal developments, including the decisions of courts and administrative bodies. Nothing in this alert should be construed as legal advice or a legal opinion. Readers should not act upon the information contained in this alert without seeking the advice of legal counsel. Views expressed are those of the author(s) and not necessarily this law firm or its clients. Prior results do not guarantee a similar outcome.