You’ve probably heard the clips. Donald Trump on a rally stage, pointing to a crowd of cheering supporters, promising that if you work an extra ten or twenty hours this week, the government isn't going to touch a dime of that extra pay. It sounds like a dream for anyone grinding out 60-hour weeks in a warehouse or on a construction site. But as we head into the 2025 tax filing season, the reality of Trump's no tax on overtime policy is hitting the ground, and it’s a lot more technical than a campaign slogan.
Honestly, the name itself is a bit of a misnomer. Most people think it means their paycheck will just stay "full" when they hit hour 41. It doesn't.
How the "One Big Beautiful Bill" Actually Works
In July 2025, the "One Big Beautiful Bill" (OBBB) was signed into law, making the Trump's no tax on overtime proposal a legal reality, at least through 2028. But here is the thing: it’s not an "exemption" in the way your social security check might be. It’s an above-the-line deduction.
What does that mean for you?
Basically, you still see taxes coming out of your paycheck every Friday. Your employer is still required to withhold federal income tax, Social Security, and Medicare. You don't get the "no tax" benefit until you actually file your tax return. When you sit down to do your taxes in early 2026, you'll see a new spot to list your "qualified overtime compensation."
The $12,500 Limit
You can't just work 100 hours a week and pay zero tax on all of it. The law caps the deduction at $12,500 for single filers and $25,000 for married couples filing jointly. If you’re a high-flyer, there's a phase-out. Once your Modified Adjusted Gross Income (MAGI) hits $150,000 ($300,000 for joint filers), the benefit starts to shrink. For every $1,000 you earn over that limit, you lose $100 of the deduction.
If you make $200,000 as a single person? Sorry. You're getting nothing from this.
Only the "Premium" Counts
This is where it gets really confusing, and frankly, kind of annoying for anyone trying to do the math. The IRS isn't letting you deduct your entire overtime check. They are only letting you deduct the "premium" required by the Fair Labor Standards Act (FLSA).
Let’s look at a quick example:
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- You make $20 an hour.
- Your overtime rate is $30 an hour (time-and-a-half).
- The "regular" part of that pay is $20.
- The "premium" is the extra $10.
Under Trump's no tax on overtime rules, you only get to deduct that extra $10 per hour. If you worked 100 hours of overtime this year, you’d have $3,000 in overtime pay, but only $1,000 of that would be deductible. If your boss is super generous and pays you double time ($40/hr), the deductible portion is still only $10. The law specifically keys off the 0.5x premium mandated by federal law.
Who Is Actually Eligible?
Not everyone with a job qualifies. The law is very specific about using the FLSA definitions.
- Non-Exempt Workers: If you’re hourly, you’re generally in the clear.
- The Salary Trap: If you’re a "white-collar" salaried worker (manager, accountant, etc.) making more than $35,568, you’re usually exempt from overtime laws. Since you don't legally have to be paid overtime, you can't claim the deduction.
- No 1099s: If you’re a gig worker or an independent contractor, you're out of luck. The FLSA doesn't cover you, so this deduction doesn't apply to your "extra" work.
The 2025 "Safe Harbor" Chaos
Since the law was signed in the middle of 2025, employers weren't ready. Most payroll systems weren't tracking "FLSA premium pay" as a separate line item. To keep everyone from losing their minds, the Treasury Department created a "Safe Harbor" rule for the 2025 tax year.
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If your pay stub just shows a big lump sum for overtime, the IRS is letting you estimate. Usually, they'll let you take one-third of your total overtime pay and call it the "deductible premium" for this year only. Starting in 2026, your W-2 is going to look a lot more crowded as employers are forced to break this out into specific boxes.
Why Economists Are Worried
While workers love the idea of keeping more cash, groups like the Tax Foundation and the Budget Lab at Yale have some pretty grim projections. They estimate Trump's no tax on overtime will suck about $90 billion out of federal revenue over the next four years.
There's also the "fairness" problem. Imagine two people both earning $60,000 a year. One works a steady 40 hours a week for a high hourly wage. The other works 50 hours a week for a lower base wage plus overtime. Under this new law, the person working more hours pays significantly less in taxes, even though their total income is exactly the same.
Some labor experts also worry this creates a perverse incentive. Employers might keep base wages low to "nudge" employees into working 50 or 60 hours, knowing the tax break makes those extra hours more attractive. It could end up killing the 40-hour work week by making "overwork" the only way to get ahead.
What You Should Do Right Now
If you’re planning on claiming this, don't just wing it.
- Audit your pay stubs: Look for "FLSA Overtime" vs. "Contractual Overtime." Only the federal requirement counts.
- Talk to your payroll dept: Ask if they are ready for the new W-2 reporting requirements. If they aren't, you might have to do a lot of manual math come April.
- Adjust your expectations: Remember, this doesn't touch your Social Security or Medicare taxes (FICA). You’re still paying that 7.65% on every dollar, overtime or not.
- Check state laws: Just because the federal government isn't taxing it doesn't mean your state won't. States like Wisconsin are trying to follow suit, but many others will still take their cut.
The "no tax" dream is real, but it's wrapped in a lot of red tape. Make sure you have your hours logged and your receipts ready before you count on that refund.
Next Steps for Tax Prep:
- Download your 2025 pay summaries: You'll need to identify the exact "premium" portion of your overtime pay if your employer hasn't already broken it out on your W-2.
- Calculate your MAGI: If you are nearing the $150,000 threshold, your deduction will be reduced, so plan your withholdings accordingly.
- Consult a tax professional: Because this is a brand-new "above-the-line" deduction, many DIY software packages may still be updating their logic for the 2025-2026 filing season.