Your Nanny Just Got a Federal Tax Break. Here’s What Both of You Should Know.

The One Big Beautiful Bill Act handed hourly caregivers a new federal deduction on overtime pay. It costs families nothing. The savings go straight to your nanny. Here’s what’s worth knowing.

Most tax news doesn’t make it onto our radar. But the One Big Beautiful Bill Act, which was signed into law on July 4, 2025, includes one provision that’s directly relevant to the families and caregivers we work with every day. It’s not complicated and it doesn’t cost families anything—it puts real money back in your nanny’s pocket. Here’s what you need to know.

What It Is

Starting with the 2025 tax year—and running through 2028—hourly employees who receive qualifying overtime pay can deduct the premium portion of those wages from their federal taxable income. In plain terms: if your nanny works more than 40 hours in a week, the extra pay they earn on top of their regular rate—the “bonus half” of time-and-a-half—is no longer counted as taxable income, up to a cap. They keep more of what they earned, while as their employer, you don’t pay anything extra to make that happen.

The deduction belongs entirely to the employee. For families, this won’t change your payroll, gross wages, or FICA contributions. The deduction will show up when your nanny files their tax return—not in their weekly paycheck.

What Changed and What Didn’t

When your nanny works overtime, they earn time-and-a-half. The “time” is their regular rate and the “half” (aka the premium) is what’s now federally deductible, up to $12,500 per year for an individual filer or $25,000 for a married couple filing jointly.

The deduction phases out for employees earning above $150,000 in modified adjusted gross income ($300,000 for joint filers), which means for most nannies, the full deduction applies. It must be FLSA-required overtime to qualify, meaning hours worked over 40 in a seven-day workweek. And it is temporary: the current provision runs through the 2028 tax year, after which Congress would need to extend it.

Before this law passed, overtime pay was treated like any other wage. It was fully taxable as ordinary income at the employee’s standard federal rate. There was no deduction, exemption, or distinction between regular hours and overtime hours when it came time to file. A nanny earning overtime simply paid federal income tax on all of it, the same as they would on any other paycheck. 

For families, not much changes and you’re not required to administer anything new: Gross wages and FICA withholding remain the same. This new policy is entirely a benefit for your W-2 employee. 

What This Looks Like in Real Life

For a nanny earning $25 an hour who regularly works five hours of overtime per week. The overtime premium—the extra “half” above their regular rate—is $12.50 per hour. Over 52 weeks, that’s $3,250 in deductible premium pay. Depending on their tax bracket, that translates to roughly $400–$700 in reduced federal income tax for the year. For caregivers who routinely work overtime, this overtime can add up meaningfully.

How It Gets Reported

For the 2025 tax year, the IRS has designated a transition period for reporting, meaning the requirements are still being finalized. Employers are encouraged to provide employees with a separate accounting of their FLSA overtime premiums paid during the year. If you use a payroll provider like Hello Nanny!’s payroll service, Hello Pay, this should be handled for you.

Starting in 2026, the IRS has indicated the qualified overtime amount will likely appear in Box 12 of the W-2 under code “TT.” As of summer 2026, the form is still in draft and subject to change before it’s finalized. When the time comes to file, your nanny’s tax preparer or payroll provider will know what to look for.

If your nanny asks about this new policy, the short answer is: ask your tax preparer about the overtime deduction when you file, and make sure your employer has provided a record of your FLSA overtime premiums for the year.

One Important Limitation: Live-In Nannies Don’t Qualify

Because this deduction is tied specifically to FLSA-required overtime, live-in nannies are exempt under federal law and cannot claim it, even if your family voluntarily pays them at an overtime rate. Voluntary overtime pay is a generous practice, but it doesn’t meet the FLSA threshold that makes the deduction available.

Similarly, state-mandated overtime for live-in employees doesn’t qualify. If your live-in nanny receives overtime under a state law, that pay doesn’t translate to the federal deduction. Only FLSA-required overtime for live-out employees working more than 40 hours in a seven-day workweek qualifies.

Why This Is Worth Paying Attention To

We’ve always said that household employment is real employment and should be treated as such. The people caring for your children and your family deserve the same legal structures and protections as any other worker and this deduction is a small but meaningful reflection of that.

For families: this is one more reason why paying legally matters. W-2 employment is the structure that allows your nanny to access benefits like this one. Under-the-table arrangements that don’t produce W-2s and track overtime premiums leave your employee with no documentation to claim any benefits when they file.

For nannies: if you worked overtime hours in 2025 or 2026 and beyond, ask your tax preparer or payroll provider about the qualified overtime deduction when you file. Make sure your employer has provided a record of your FLSA overtime premiums for the year and be sure to keep your own records as a backup.

Ready to make sure your nanny’s overtime is tracked and reported correctly? Hello Pay, Hello Nanny’s payroll service handles it all for you. Or, reach out to our team with questions about your specific situation.