No Tax on Overtime: What Workers Should Know

A Big Promise – With Real Limits

On July 4, 2025, President Trump signed the expansive One Big Beautiful Bill Act into law. Among its sweeping provisions is a high-profile commitment: the promise of “no tax on overtime.” But what does this new deduction truly mean?

Contrary to what the name suggests, this provision does not fully exempt overtime pay from federal taxes. Instead, it allows a tax deduction—above-the-line—for a portion of overtime wages, reducing taxable income rather than eliminating the tax entirely.

What’s Deductible (and What’s Not)

Only the premium portion of overtime pay qualifies – in other words, the “extra” half-time for hours worked beyond the standard weekly limit. For example, if your regular rate is $20/hour and your overtime rate is $30, the deductible portion is just the $10 premium per overtime hour. Also note that if overtime is paid based on daily hours worked, only the overtime pay related to hours worked in excess of a 40-hour week will qualify for the deduction.

The maximum deduction per year is:

• $12,500 for single filers
• $25,000 for married couples filing jointly

These deductions apply only to federal income taxes. You’ll still owe Social Security and Medicare (FICA), and state or local taxes still apply. Wisconsin has introduced a bill to exempt overtime pay, but it has not been passed into law as of yet.

Eligibility: Who Qualifies – and Who Doesn’t

To claim the deduction, you must:

• Have a valid Social Security number (and spouses must include SSNs on joint returns)
• Be employed under the Fair Labor Standards Act (FLSA) – meaning state-based overtime rules or contract agreements generally don’t qualify.
• File: The deduction is available to both itemizers and standard deduction filers, making it broadly accessible.

Income Caps & Phase-Outs

The benefit phases out based on Modified Adjusted Gross Income (MAGI):

• Single filers: Phase-out begins at $150,000 MAGI
• Married filing jointly: Phase-out begins at $300,000 MAGI

When & How to Claim It

The deduction applies retroactively from January 1, 2025, and will remain in effect through 2028.

For tax year 2025, you’ll first claim this deduction when filing your return in 2026.

Starting in 2026, employers are expected to modify payroll withholding and W 2 reporting to reflect the deduction. For 2025, employers can use “reasonable methods” to estimate qualifying overtime. Form W-2 for 2025 will not be changed, so employers will need to provide eligible employees this supplemental information separately or in Box 14 on the W-2. Draft versions of the 2026 W-2 indicate new codes for Box 12 will be available to report this information in the future.

Notably, you cannot claim both “no tax on tips” and “no tax on overtime”- you must choose between them.

What Does This Mean for You?

This provision offers a meaningful tax break if you work overtime and meet the criteria. Here’s a quick overview:

If you’re regularly working overtime, this can reduce your federal tax bill which can be especially helpful in managing tax brackets or improving refund outlooks. Just be sure to track your qualifying overtime properly and consult your tax professional when filing.

While “no tax on overtime” sounds sweeping, it’s really a targeted deduction designed to soften the load on hardworking Americans, yet it comes with specific limitations, thresholds, and a clear sunset. Maximizing it requires awareness and savvy planning that our team of advisors would be happy to discuss with you. Connect with us today!