No Tax on Overtime in 2025: What You Need to Know..
Starting January 1, 2025, under the One Big Beautiful Bill Act (Public Law 119‑21, signed July 4 2025), a new temporary rule lets eligible workers deduct the “premium” portion of overtime pay (i.e. the half‑portion of time‑and‑a‑half) from federal income tax. This applies for the 2025–2028 tax years.
This blog breaks down eligibility, qualified overtime, income limits, employer obligations, and what it means for take‑home pay.
1. What Is the Overtime Tax Break?
- Known as “No Tax on Overtime”, it’s a new above‑the‑line deduction: reduces taxable income, even if you don’t itemize.
- Applies only to overtime pay above your normal rate (the “half” in time‑and‑a‑half). So if regular is $20/hr and overtime $30/hr, that $10/hr qualifies.
- Deduction limits: up to $12,500/year for individuals, $25,000 if married filing jointly.
- Available only through 2028, starting retroactively January 1, 2025.
2. Who Can Claim It?
a) Employee Requirements
- Must be a non‑exempt W‑2 employee under the FLSA (Fair Labor Standards Act).
- Overtime must meet federal FLSA rules (over 40 hours/week). State or contract overtime not eligible unless it also meets FLSA. ʻExemptʼ workers (such as salaried professionals) generally don’t qualify.
- Non‑exempt salaried workers still eligible as long as FLSA applies.
b) Income Limits (Phase‑Out Thresholds)
- Begins to phase out at $150,000 MAGI for individuals and $300,000 for joint filers.
- Very high earners may get partial or zero deduction. Critics say many benefits go to higher middle‑income households.
c) Filing Basics
- Must include a valid Social Security number on return.
- Joint filers both spouses must qualify to claim full $25K. Deduction not available for Married Filing Separately.
3. How Much Can You Save?
- For many overtime earners, the deduction can reduce tax burden by $1,400–$1,750 per year, based on average overtime patterns.
- Maximum savings up to around $6,000, depending on your tax bracket and overtime earnings.
- Only applies to federal income tax. You still owe Social Security and Medicare taxes on all overtime wages.
4. Employer Implications & Reporting
a) Payroll & Recordkeeping
- Employers must track qualified overtime separately.
- For tax year 2025, some transition relief allows employers to approximate overtime classification. Expect new guidelines soon.
b) New W‑2 Reporting Fields
- Beginning 2026, Form W‑2 and Form 1099 (for eligible contractors, though they cannot claim) must include separate fields to report qualified overtime compensation.
c) Withholding & IRS Guidance
- Withholding rules remain the same for 2025, but IRS may revise withholding tables or Form W‑4 in later years.
d) Risk of Misclassification
- Employers need to avoid classifying exempt employees improperly to game eligibility. IRS will issue anti‑abuse rules.
5. Step‑by‑Step: How Employees Claim the Deduction
- Make sure your employer accurately reports qualified overtime on your W‑2.
- When filing Form 1040 for tax year 2025 (filed in 2026), use the new deduction line for overtime premium.
- No itemizing required—applies even if you use the standard seduction
- Keep overtime stubs and records in case of IRS audit.
- Watch for IRS worksheets or instructions clarifying deduction math. They are expected later in 2025.
Q1: Is all overtime tax‑free?
A: No—only the “half portion” of time‑and‑a‑half pay for overtime under FLSA is deductible. Standard overtime is still taxed.
Q2: Are you eligible if you earn over $160K/year?
A: The deduction phases out starting at $150,000 MAGI, so high earners may receive reduced benefit or none at all, especially single filers above that level.
Q3: Do gig workers qualify?
A: No—only non‑exempt W‑2 employees under the FLSA are eligible. Independent contractors and gig workers do not qualify.
Q4: Does this benefit apply to state income taxes?
A: Not automatically. This change applies to federal income tax only. State treatment varies—check with your state’s tax authority.
Q5: How does this affect payroll taxes?
A: Payroll taxes (Social Security and Medicare) still apply to overtime earnings—even the portion that qualifies for the deduction.
