If you’ve been scrolling through your news feed or chatting in the breakroom lately, you’ve probably heard the buzz. People are calling it "tax-free overtime," and it sounds like a dream. Imagine putting in those extra ten hours at the warehouse or finishing that grueling double shift and actually keeping the whole check. No Uncle Sam taking his bite out of the "time-and-a-half" portion.
But when does no tax on overtime go into effect exactly? Honestly, the answer is a bit of a "good news, bad news" situation.
The law is technically already live. It’s part of the One Big Beautiful Bill Act (OBBBA), which President Trump signed back on July 4, 2025. But here’s the kicker: even though it applies to work you did in 2025, most of us won’t feel the real impact until right now—the 2026 tax season.
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The Confusion Over the Start Date
The "no tax on overtime" provision retroactively took effect on January 1, 2025.
That means if you worked extra hours last year, you’re already eligible for the deduction. However, because the bill passed in the middle of 2025, the IRS and payroll companies were basically caught with their pants down. Most employers didn’t have the software ready to stop withholding taxes from your overtime pay in real-time.
So, you likely still saw taxes coming out of your overtime pay all through 2025.
Starting in January 2026, things change. The IRS has updated the forms—specifically the new Schedule 1-A—and employers are now required to use a specific code, "TT," in Box 12 of your W-2. This is the year where the "no tax" part actually hits your bank account, either as a bigger refund this spring or through adjusted withholding on your 2026 paychecks.
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How much do you actually keep?
Don't quit your day job thinking you're suddenly a millionaire. The law doesn't make all your overtime pay tax-free. It’s a deduction.
Specifically, you can deduct the "extra" money you earned for working over 40 hours. If your regular rate is $20 an hour and your overtime rate is $30, only that extra $10 (the "half" in time-and-a-half) is deductible. The base $20 is still taxed like normal.
- Single Filers: You can deduct up to $12,500 of that "premium" pay.
- Joint Filers: You get a cap of $25,000.
There are income limits too. If you’re a high earner, the benefit starts to vanish. The phase-out begins at $150,000 for individuals and $300,000 for married couples. If you make over $275,000 solo, you’re basically out of luck; the deduction hits zero.
Why 2026 is the real "Go-Live" year
For the 2025 tax year (the returns you’re filing right now in early 2026), the IRS gave employers a "grace period." They didn't have to perfectly track every cent of qualified overtime because the law was so new.
But for 2026? The training wheels are off.
The IRS Chief Executive Officer, Frank Bisignano, recently confirmed that the agency is ready for the 2026 filing season. They’ve launched trumpaccounts.gov and updated the W-4 forms. If you want to see the "no tax" benefit in your weekly paycheck now instead of waiting for a refund in 2027, you need to update your Form W-4 with your employer.
Who is actually eligible?
It’s not for everyone. This is strictly for "non-exempt" employees covered by the Fair Labor Standards Act (FLSA).
- Hourly Workers: Most people who punch a clock qualify.
- Specific Salaried Workers: If you’re salaried but earn under a certain threshold (historically around $684/week, though this moves), you might still be non-exempt and eligible.
- Excluded Groups: If you get overtime pay because of a private contract or a specific state law that isn't required by the federal FLSA, that money might not count for the deduction.
The Fine Print: Payroll Taxes Still Exist
This is where people get grumpy. "No tax on overtime" only refers to federal income tax.
You still have to pay:
- Social Security (6.2%)
- Medicare (1.45%)
- State Income Tax (unless you live in a place like Florida or Texas)
So, your check won't be "pure" gross pay. You’re still contributing to the system; you're just not giving the federal government an extra slice for your hard work.
Practical Steps to Take Now
Since we are officially in the 2026 tax season, you shouldn't just sit and wait.
First, check your W-2. When you receive it this month, look at Box 12. If your employer followed the new IRS guidance, you should see code TT followed by a dollar amount. That is the "qualified overtime compensation" you'll use to claim your deduction. If it's not there, you’ll have to use the "reasonable method" of estimation provided in IRS Notice 2025-69.
Next, grab the new Schedule 1-A. You cannot claim this deduction on the standard 1040 alone. This new schedule is specifically designed for the OBBBA's "big four" deductions: overtime, tips, seniors, and car loan interest.
Finally, adjust your withholding. If you plan on working a ton of overtime this year, talk to your HR department. By filling out a new W-4, you can account for the $12,500 deduction upfront. This means less tax is taken out of every check throughout 2026, putting that money in your pocket today rather than a year from now.
The law is set to expire on December 31, 2028, so we’ve only got a few years of this. It pays to make sure you're getting every cent the law allows while it lasts.