If you've been scanning your paystub lately wondering why Uncle Sam is still taking a bite out of those extra Saturday hours, you aren't alone. There's been a massive amount of noise about "no tax on overtime" lately.
The short answer? It technically started on January 1, 2025.
But wait. Like everything involving the IRS, it's not quite as simple as "work extra, keep every penny." We are currently living through the first full year where this is actually a thing, thanks to a massive piece of legislation officially titled the One Big Beautiful Bill Act (OBBBA), which President Trump signed into law on July 4, 2025.
Because the law was signed in the middle of the year but made retroactive, we’re in a weird transition period right now in early 2026.
When did the no tax on overtime start for real?
While the federal law officially kicked in for the 2024–2025 tax cycle, it didn't just appear out of thin air. The concept really gained steam as a campaign promise during the 2024 election. Once the OBBBA was signed in July 2025, the IRS had to scramble. They backdated the effectiveness to January 1, 2025.
What does that mean for you today?
📖 Related: Finding a Different Word for Leader That Actually Fits Your Vibe
It means when you file your taxes this spring (for the 2025 work year), you can finally claim a deduction for that overtime pay. But honestly, most employers weren't ready for this in real-time last year. If your boss was still withholding federal income tax on your OT in 2025, you'll basically get that money back as a larger refund when you file your 1040.
For the 2026 tax year—the one we are in right now—the IRS has mandated that employers start using a new code on W-2s. It’s a draft code "TT" in Box 12, though that might shift slightly as the final forms roll out. The goal is to make it so you see the benefit in your actual weekly paycheck rather than waiting for a refund check months later.
The Alabama "First Mover"
Interestingly, Alabama beat the federal government to the punch. If you live in the Yellowhammer State, you’ve actually been dealing with this longer. Alabama’s state-level exemption for overtime pay started on January 1, 2024.
It was a pilot program of sorts. The state legislature wanted to see if it would actually encourage people to work more or if it would just blow a hole in the state budget. Because of Alabama's move, many payroll companies already had a "dry run" of how to track these hours before the federal law went live.
What "No Tax" Actually Means (The Fine Print)
Don't go spending your whole check just yet. "No tax" is a bit of a misnomer. It’s actually a federal income tax deduction.
Here is the breakdown of what is actually covered:
- The "Half" in Time-and-a-Half: This is a big one. The law generally applies to the premium portion of your pay. If you make $20 an hour and your OT rate is $30, the deduction usually applies to that extra $10 "bonus" you get for working over 40 hours.
- The $12,500 Cap: For single filers, the deduction is capped at $12,500 of qualified overtime compensation. If you're married and filing jointly, that cap jumps to $25,000.
- Income Phase-outs: If you're a high earner, you might not get this at all. The benefit starts to disappear (phase out) once you hit a Modified Adjusted Gross Income (MAGI) of $150,000 for individuals or $300,000 for married couples.
One thing that hasn't changed? Payroll taxes. You still have to pay Social Security and Medicare taxes on every dollar of overtime. Those are the "FICA" lines on your check. The new law only targets the federal income tax portion. So, your check won't be 100% gross-to-net, but it will certainly be fatter than it was in 2023.
Who is actually eligible?
The law specifically points toward "non-exempt" employees under the Fair Labor Standards Act (FLSA). Basically, if you are an hourly worker who is legally entitled to overtime, you're in.
If you're a salaried "exempt" manager who works 60 hours a week but doesn't get paid extra for it? Sorry. This law doesn't give you a back-door deduction. It only applies to "qualified overtime compensation" that is actually paid out and reported by your employer.
Why the 2028 Sunset Matters
Nothing in D.C. lasts forever. As it stands, the "no tax on overtime" provision is set to expire on December 31, 2028.
✨ Don't miss: American Dollar to Philippine Peso: What Most People Get Wrong
Lawmakers did this for a few reasons. First, it makes the bill look cheaper on paper when the Congressional Budget Office (CBO) calculates the 10-year cost. Second, it gives Congress a "cliff" to negotiate later. If people love the tax break, politicians can use the promise of extending it to get votes in the 2028 election cycle.
If it isn't extended by then, we go right back to the old system on January 1, 2029.
Practical Steps for 2026
Since we are now in the 2026 tax year, you need to be proactive.
First, check your W-4. You might want to adjust your withholdings. Because this deduction is now "live," you might be over-withholding if you haven't updated your forms recently. Talk to your HR department or a tax pro to see if you should dial back the amount of tax being taken out of your regular checks.
Second, save your paystubs. While the IRS is requiring employers to report this in Box 12 of your W-2, mistakes happen—especially with a law this new. Having a paper trail of exactly how many OT hours you worked and the "premium" pay you received will save you a massive headache if your W-2 comes back looking wrong.
✨ Don't miss: Why 260 Peachtree Street Atlanta is More Than Just Another Downtown Office Tower
Lastly, don't forget your state taxes. Unless you live in Alabama or another state that has specifically mirrored the federal change, you likely still owe state income tax on those overtime hours. The federal deduction lowers your federal taxable income, but it doesn't automatically mean your state will follow suit.
For now, keep an eye on your 2025 tax return filing. It's the first time you'll actually see the "no tax on overtime" benefit reflected in your bank account, and for a lot of people, that refund is going to be a lot bigger than they expect.
Next Step: Review your most recent paystub to see if your employer is separately tracking "Overtime Premium" pay; if they aren't, send a quick email to your payroll department asking how they plan to report "Qualified Overtime Compensation" for your 2026 W-2.