It happened. After months of campaign trail promises and enough back-and-forth in DC to make your head spin, the "No Tax on Overtime" rule is actually a real thing. President Trump signed the One Big Beautiful Bill Act (OBBB) into law on July 4, 2025.
Basically, if you’re someone who puts in those grueling extra hours at the warehouse, the hospital, or on the construction site, you’ve probably noticed your paycheck looks a little bit fatter. Or at least, it will when you file your taxes.
But here is the thing: the name "No Tax on Overtime" is a little bit of a marketing stretch. It’s not like the IRS just forgot you earned that money. Instead, it’s structured as a massive federal income tax deduction. You’re still going to see Social Security and Medicare (payroll taxes) coming out of that overtime check.
And honestly? The rules for what counts as "overtime" are kind of specific. It isn’t just any extra money your boss throws your way.
The Breakdown: Did the Bill Pass for No Taxes on Overtime?
Yes, the bill passed. It’s officially part of the Working Families Tax Cut.
But don't expect a free-for-all. The law is technically temporary, running from the 2025 tax year through 2028. If Congress doesn't renew it by then, we're back to the old way of doing things.
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The biggest catch? The deduction only applies to what the IRS calls "qualified overtime compensation."
If you’re a non-exempt employee—the kind of worker covered by the Fair Labor Standards Act (FLSA)—you can now deduct up to $12,500 of your overtime pay from your federal taxable income. If you're married and filing jointly, that number jumps to $25,000.
How the Math Actually Works
This isn't a "dollar-for-dollar" credit. It’s a deduction. That means it lowers the amount of your income that the government can actually tax.
Let's say you make $20 an hour. When you work overtime, you get time-and-a-half, which is $30. Under the new law, you don't get to deduct the whole $30. You only get to deduct the "extra" half—the $10 premium.
- Regular Pay: $20 (Taxed normally)
- Overtime Premium: $10 (This is the "qualified" part you can deduct)
It feels a bit like a bait-and-switch if you were expecting the whole check to be tax-free, but it’s still a significant chunk of change. If you max out the $12,500 deduction, you could be looking at thousands of dollars back in your pocket depending on your tax bracket.
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Who Actually Gets to Claim This?
Not everyone is invited to the party.
If you're a "white-collar" exempt employee—think managers or professionals on a high salary who don't get paid extra for staying late—you're out of luck. This bill was specifically designed for hourly workers and those earning under certain thresholds.
There's also an income limit. If you're a high-earner, the benefit starts to vanish.
- Single Filers: The deduction starts phasing out if your Modified Adjusted Gross Income (MAGI) hits $150,000. Once you cross $275,000, it's gone completely.
- Joint Filers: The phase-out starts at $300,000 and hits zero at $550,000.
Also, a quick heads-up for those who prefer to file separately from their spouse: you can't. To get this deduction, married couples must file jointly.
What About Your 2025 and 2026 Taxes?
Since the law passed in July 2025 but was retroactive to the start of the year, things are a little messy right now.
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For the 2025 tax year (the ones you're likely filing right now in early 2026), employers weren't required to have their systems ready. Most W-2s for 2025 won't have a specific box for overtime. The IRS is allowing "reasonable estimates" for this transition year. You'll likely need to dig through your old pay stubs and do a little manual math or use a worksheet on the new Schedule 1-A.
Moving into the 2026 tax year, it gets more official. The IRS has already drafted a new W-2 format. Look for Box 12, Code TT. That’s where your boss will specifically list your qualified overtime so you don't have to guess.
The "Fine Print" Nobody Mentions
People keep asking if this means they’ll get more overtime. Honestly? Maybe.
Since the government is basically subsidizing your extra work, you might be more willing to pick up that Saturday shift. On the flip side, your employer still has to pay their share of payroll taxes on those wages. It doesn’t make the labor cheaper for them, just more profitable for you.
Also, remember that state taxes are a different beast. Just because the federal government says "no tax" (or "less tax") doesn't mean your state will follow suit. Unless your state legislature passed a matching bill, you might still owe state income tax on every penny of that overtime.
What You Should Do Right Now
- Save your pay stubs. Since 2025 is a "transition year," your W-2 might not show the breakdown. You'll need those stubs to prove how much of your pay was the "time-and-a-half" premium.
- Check your withholding. If you’re working a ton of overtime, you might be over-withholding. Talk to your HR department about updating your Form W-4 to reflect the new deduction.
- Don't skip Schedule 1-A. This is the new form where the magic happens. Whether you use TurboTax, H&R Block, or a local CPA, make sure they know you're claiming the OBBB overtime deduction.
- Watch the 2028 sunset. This law is a four-year experiment. Keep an eye on the news in late 2027 to see if it’s getting extended, or if you need to adjust your budget for a "return to normal."
The bottom line is that the bill did pass, and for the millions of Americans who rely on overtime to make ends meet, it’s a massive win—even if the paperwork is a bit of a headache for the first year.