You've just finished a sixty-hour week. Your back hurts, your coffee is cold, and you’re dreaming of that extra comma on your paycheck. Then you open the envelope or the PDF, and it hits you. The taxman took a massive bite out of those extra hours. It feels like you’re being punished for working hard. It’s one of the most common complaints in breakrooms from Scranton to San Francisco. So, everyone wants to know: when will tax on overtime stop?
The short, somewhat painful answer is that there is no current law in the United States that sets an expiration date for taxes on overtime pay. Under the Internal Revenue Code, all income—whether it's your first hour of the week or your fiftieth—is considered taxable. But that isn't the whole story. Politics is shifting. There’s a lot of noise about "No Tax on Overtime" proposals, and depending on who wins the next few rounds of legislative musical chairs, the rules could actually change.
The Reality of the Overtime Tax Trap
People often think they’re "losing money" by working overtime. You’ve probably heard a coworker say, "Don't work more than ten hours of OT, or the government takes it all."
That’s a myth. Mostly.
The U.S. uses a progressive tax bracket system. When you work a ton of overtime, your employer’s payroll software often looks at that specific check and assumes you make that much every single week. If a huge overtime surge pushes you into a higher bracket for that pay period, the software withholds a larger percentage. It’s a temporary sting. When you file your taxes at the end of the year, the IRS looks at your total annual income. If you were over-withheld, you get it back as a refund.
But a refund in April doesn't help you pay rent in October.
Political Promises and the No Tax on Overtime Movement
Recently, the conversation about when will tax on overtime stop has moved from the water cooler to the campaign trail. During the 2024 election cycle and into 2025, various political figures, most notably Donald Trump, floated the idea of making overtime pay completely tax-exempt. The logic is pretty straightforward: encourage productivity and put more money directly into the pockets of the working class.
Imagine if your time-and-a-half was actually time-and-a-half.
If you make $20 an hour, your overtime rate is $30. If that $30 was tax-free, you’d keep every penny. Right now, after federal, state, and FICA taxes, that $30 might look more like $21 or $22. Eliminating the tax would be a massive raises for nurses, police officers, factory workers, and retail managers.
Critics, however, point to a massive hole in the federal budget. The Committee for a Responsible Federal Budget (CRFB) has noted that such a policy could reduce tax revenue by trillions over a decade. There’s also the "relabeling" problem. If overtime isn’t taxed, what stops a CEO from saying their base salary is $1 a year and the rest is "overtime"? Regulators would have to write thousands of pages of rules to prevent white-collar workers from gaming a system meant for blue-collar laborers.
How Your Overtime is Actually Calculated Right Now
Until a bill actually passes through Congress and gets a presidential signature, we are stuck with the status quo. To understand why your check looks the way it does, you have to look at the Fair Labor Standards Act (FLSA).
The FLSA says that for most hourly employees, any work over 40 hours in a seven-day workweek must be paid at at least 1.5 times the regular rate of pay.
- Your regular rate is calculated.
- The 1.5 multiplier is applied.
- The IRS treats the result as "ordinary income."
There is no "special" overtime tax rate. It’s just that the volume of money triggers different withholding rules. If you’re a single filer making $45,000 a year, you’re in the 12% bracket. But if a massive overtime project pushes your total yearly earnings to $100,000, those extra dollars fall into the 22% bracket. You’re still making more money than if you hadn't worked the hours, but the "efficiency" of your labor drops. You’re working just as hard for a smaller net return per hour.
Will We See a Federal Change by 2026?
The legislative path is messy. For taxes on overtime to stop, a bill would need to pass the House and the Senate. Given the current polarization, even "popular" ideas get stuck in the gears.
Some economists argue that instead of a total tax exemption, we might see a "tax credit" for overtime hours. This would be a middle ground. You’d still pay the tax upfront, but you’d get a specific, dollar-for-dollar credit when you file. It wouldn't help your weekly cash flow as much, but it would ensure the benefit goes to the right people.
Honestly, the biggest hurdle isn't the idea itself—it's the math. The U.S. deficit is a constant shadow over tax reform. Any plan to stop taxing overtime has to answer the question: where does the money come from instead? Unless there are massive spending cuts or a new tax on something else, a total end to overtime tax remains a high-profile "maybe."
States Taking the Lead
While the federal government drags its feet, some states are experimenting. Alabama, for instance, took a bold step. Starting in 2024, Alabama began exempting overtime pay from state income tax for hourly workers.
It’s a pilot program of sorts.
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If you work in Alabama, you still pay federal tax on your OT, but the state portion—usually around 5%—stays in your pocket. Other states are watching the Alabama experiment closely. If Alabama sees a spike in labor participation and worker satisfaction without a total collapse of their state budget, you might see "red" and "blue" states alike following suit. It's much easier to pass these laws at the state level than at the federal level.
Why "When Will Tax on Overtime Stop" is the Wrong Question
Instead of waiting for a date that might never come, it's better to look at how you can minimize the damage now. You can't stop the tax, but you can manage the impact.
One move is adjusting your W-4. If you know you're going to work 500 hours of overtime this year, you can work with a CPA to adjust your withholdings so the "surge" doesn't hit your check so hard. Just be careful—if you under-withhold, you’ll owe the IRS a check in April, plus possible penalties.
Another thing to consider is your retirement contributions. If you’re getting hammered by taxes on a big overtime check, increasing your 401(k) or traditional IRA contribution can lower your taxable income. You’re essentially taking money the government would have taxed at 22% and hiding it in a "tax-deferred" bucket for your future self. It’s a win-win, even if it doesn't give you the cash for a jet ski today.
Moving Toward a Solution
We are currently in a "wait and see" period. The discussion around when will tax on overtime stop is louder than it has been in decades. This is good news. It means the pressure is on lawmakers to recognize that the current system discourages the very thing that keeps the economy moving: hard work.
Here is what you should do to stay ahead of the curve:
- Track your hours religiously. Don't just trust the payroll software. Errors happen, especially with complex OT calculations.
- Monitor Alabama’s results. If the "Alabama Model" works, start writing to your local state representatives. State-level change is far more likely in the next 24 months than federal change.
- Talk to a tax pro. If you are consistently working 50+ hours a week, a standard 1040-EZ approach might be costing you money. There are nuances in how "bonuses" vs "overtime" are taxed that could be relevant to your specific contract.
- Keep an eye on the 2026 budget hearings. This is where the real "No Tax on Overtime" language will either live or die. If it isn't in the budget reconciliation, it isn't happening this year.
The tax code is a living document. It changes because people get tired of the status quo. While we don't have a calendar date for the end of overtime taxes, the momentum is finally moving in the direction of the worker. Until then, keep an eye on your paystubs and make sure you’re at least getting the credits you’re already owed.