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You’ve probably heard the buzz at work or seen the clips on social media. People are talking about "no tax on overtime" like it’s a total game-changer for every hourly worker in the country. But if you’re looking at your latest pay stub and wondering why Uncle Sam still took his cut, you aren't alone. Honestly, there is a lot of confusion out there.
Basically, the answer is yes—but with a massive "however."
President Trump officially signed the One Big Beautiful Bill Act (OBBBA) into law on July 4, 2025. It actually happened. This massive piece of legislation, often called the Working Families Tax Cut, includes a specific provision aimed at eliminating federal income tax on overtime pay. It’s retroactive too, meaning it covers the work you did starting back on January 1, 2025.
But here is where it gets kinda tricky. It’s not a "poof, taxes are gone" situation for every single dollar you earn after 40 hours. It’s structured as a tax deduction, and there are some strict rules about who qualifies and what counts as "overtime."
How the No Tax on Overtime Law Actually Works
The biggest thing to understand is that the IRS isn't just ignoring your overtime pay. Instead, the law creates a new above-the-line tax deduction for what they call "qualified overtime compensation."
When you file your taxes in early 2026 for the 2025 work year, you'll be able to claim this. It helps lower your taxable income, which in turn lowers your final tax bill.
But don’t expect your Social Security and Medicare taxes to disappear. Those are still being taken out. This law only touches federal income tax. You’re still paying into the system for your future benefits, and your employer is still paying their share of payroll taxes on those hours too.
It’s also temporary. As the law stands right now, these rules only apply for the tax years 2025 through 2028. Unless a future Congress decides to extend it, the benefit will vanish on New Year's Eve in 2028.
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The Math: Only the "Extra Half" Counts
This is the part that catches people off guard. If you earn $20 an hour normally and $30 an hour for overtime (time-and-a-half), you don’t get to deduct the whole $30.
You can only deduct the "extra" part—the $10 premium.
The law defines qualified overtime as the compensation paid "in excess of the regular rate." So, if you work a ton of extra shifts, you're only getting a tax break on that 0.5x bonus portion of your pay. If you happen to get double-time pay, the deductible amount is still usually capped at that 0.5x premium required by the Fair Labor Standards Act (FLSA).
Who is Eligible for the Deduction?
Not everyone is invited to the party. The law specifically targets workers who are covered by the FLSA.
If you’re a "non-exempt" employee—basically, someone who is legally required to be paid overtime when they work more than 40 hours a week—you’re likely in the clear. This includes millions of hourly workers in construction, manufacturing, retail, and healthcare.
However, if you are an "exempt" salaried professional who doesn't get overtime pay by law, you can't claim this. You can't just ask your boss to label part of your salary as "overtime" to get the tax break.
The Income Caps and Phaseouts
Like most tax benefits, there’s a limit on how much you can make before the government starts pulling the benefit back.
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- Single Filers: The full deduction is available if your Modified Adjusted Gross Income (MAGI) is under $150,000.
- Joint Filers: The limit is $300,000.
If you make more than that, the deduction starts to "phase out." For every $1,000 you earn over the limit, your maximum deduction drops by $100. If you’re a high-earner who still works overtime, you might find that your deduction hits zero pretty quickly.
Limits on the Total Amount You Can Deduct
There is a ceiling on how much you can actually claim on your return. Even if you work 80 hours a week every single week of the year, you can't deduct an unlimited amount.
- For a single person or head of household, the maximum deduction is $12,500.
- For married couples filing jointly, that cap doubles to $25,000.
For most people, this cap is plenty high. You would have to earn a very significant amount of overtime premium pay to hit that $12,500 limit.
What Employers and Workers Need to Do Now
Because the law was passed in mid-2025 but applies to the whole year, 2025 is what the IRS calls a "transition year."
Most payroll systems weren't set up to track the "extra half" of overtime pay as a separate line item on January 1. To fix this, the IRS is allowing employers to use any "reasonable method" to estimate your 2025 overtime pay for your W-2.
Starting in 2026, things get more official. The IRS has already released draft versions of the W-2 form that include a new code—Code TT—in Box 12. This is where your employer will specifically report your qualified overtime compensation so the IRS knows exactly how much you're allowed to deduct.
Check Your Pay Stubs
If you're a worker, start keeping your year-end pay stubs for 2025. Your employer should provide you with a separate accounting or include it on your W-2, but having your own records is smart.
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You’ll use Schedule 1-A when you file your taxes to calculate and claim the deduction.
The Bigger Picture: Tips and State Taxes
It’s worth noting that the "One Big Beautiful Bill" did more than just overtime. It also passed the No Tax on Tips provision. That works similarly, allowing tipped workers to deduct up to $25,000 in tips from their federal income.
What about state taxes?
That’s a bit of a wildcard. Some states, like Wisconsin, have already moved to align their state tax laws with the new federal rules. Other states might still tax your overtime pay even if the federal government doesn't. You'll need to check the specific laws in your state or talk to a local tax pro to see if you're getting a double win or just a federal one.
Actionable Next Steps for You
If you think you qualify for the no tax on overtime deduction, don't just wait for a check in the mail.
- Verify your status: Confirm with your HR department that you are classified as a "non-exempt" employee under the FLSA.
- Track your hours: Use a simple spreadsheet or an app to log every hour of overtime you work. Note the "premium" portion of your pay (the 0.5x part).
- Talk to your tax preparer: When you go to file your 2025 taxes in early 2026, explicitly ask about the "qualified overtime compensation deduction."
- Adjust your withholdings: If you know you'll be claiming a large deduction, you might want to update your Form W-4 with your employer so they take less tax out of your check throughout the year, giving you more "cash in hand" now.
This law is a major shift in how the U.S. treats extra work. While it isn't a total exemption for every penny of overtime, it’s a substantial break for the millions of Americans who keep the country running by putting in those long hours.