You’ve probably seen the headlines or heard someone in the breakroom buzzing about it. The idea of keeping every single cent of your time-and-a-half pay sounds like a dream, especially if you’re the person constantly pulling 50-hour weeks just to stay ahead of the bills. Well, it’s not just a campaign promise anymore. It’s actually happening.
But honestly, the "start date" is a bit of a tricky subject because of how the law was signed.
The short answer? The no tax on overtime deduction started on January 1, 2025. If you worked an hour of overtime on New Year's Day last year, that pay is technically eligible. However, since the law—formally known as the One Big Beautiful Bill Act (OBBBA)—wasn't actually signed until July 4, 2025, we’ve all been living in a weird transition period. Most people won’t see the actual "cash in hand" benefit until they file their 2025 tax returns right now, in early 2026.
The July Surprise and Retroactive Wins
It was a wild summer for tax nerds. When President Trump signed the OBBBA into law on Independence Day, it didn't just look forward; it looked backward. The law was made retroactive, meaning it covers all qualified overtime pay earned from the very first second of 2025.
Wait. There's a catch.
Because the law passed halfway through the year, your boss probably didn't stop withholding taxes from your overtime checks in 2025. Payroll systems are like giant, slow-moving cruise ships—they can't just turn on a dime. Most employers kept taking the taxes out because the IRS hadn't even released the new forms yet.
So, while the "start" was technically over a year ago, the real start for your wallet is happening right now as you prepare your 2025 tax filing. You’ll be claiming that money back as a deduction.
When Will My Paycheck Actually Change?
This is what everyone is actually asking. "When does the withholding stop?"
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For the vast majority of hourly workers, January 2026 is the true turning point for take-home pay. The IRS recently issued updated guidance (Notice 2026-02) and finalized the new Form W-4. If you haven't seen it yet, you'll likely be asked to fill out a new one soon.
Beginning this month, employers are now required to use a more sophisticated tracking system. They have to separate your "regular" pay from your "qualified overtime compensation." If you’ve updated your W-4 to reflect your eligibility, you should start seeing less federal income tax taken out of those extra hours immediately.
Why your W-2 might look weird this year
Don't panic when you get your W-2 in a few weeks. For the 2025 tax year, the IRS gave companies a "grace period." Basically, they told bosses, "Look, we know this was last-minute, so we won't fine you if you didn't track overtime perfectly in 2025."
Because of this, your 2025 W-2 might not have a specific "Overtime" box. Instead, the IRS is allowing a one-year safe harbor rule. You might have to do a little math yourself or use your final paystub from December 2025 to prove to the IRS how much of your income was actually overtime.
Starting in 2026, though, it becomes mandatory. Your 2026 W-2 (which you'll get in 2027) will have a specific code—likely in Box 12 with code TT—that spells it out clearly.
What "No Tax" Actually Means (Read This Twice)
I hate to be the bearer of bad news, but "no tax" is a bit of a marketing term. It’s a deduction, not a total disappearance of all taxes.
You are still paying Payroll Taxes.
The law specifically targets Federal Income Tax. You and your employer still have to pay the 6.2% for Social Security and the 1.45% for Medicare. Uncle Sam isn't letting those go because they fund the trust funds.
Also, the deduction only applies to the "premium" part of your pay.
Let's say you make $20 an hour normally. Your overtime rate is $30 ($20 regular + $10 premium). The "no tax" rule only applies to that extra $10. You still pay regular income tax on the base $20, even if it was worked during overtime hours. It’s a bit of a bummer, but it still adds up to thousands of dollars for heavy hitters.
The $12,500 Wall and Other Limits
There are some pretty firm fences around this playground.
- The Cap: You can only deduct up to $12,500 in overtime premiums per year. If you’re married and filing jointly, that doubles to $25,000.
- The Income Limit: This is for "working families." If you're a single filer making over $150,000, the benefit starts to shrink. If you hit $275,000, it’s gone completely.
- The FLSA Rule: You have to be a "non-exempt" employee under the Fair Labor Standards Act. If you’re a salaried manager who doesn't legally qualify for time-and-a-half, you can't just call extra work "overtime" to get the tax break.
Actionable Next Steps for Right Now
If you want to make sure you're getting every cent you're owed, don't just wait for your tax preparer to handle it.
- Download your 2025 paystubs. Since many 2025 W-2s won't show the overtime split, your final paystub of the year is your best evidence. It usually shows a "Year-to-Date" (YTD) total for overtime pay.
- Check your new W-4. Ask your HR department for the 2026 version of Form W-4. If you don't adjust your withholding, the government will keep your money until next year, effectively giving them an interest-free loan.
- Look for Schedule 1-A. This is the new form you'll need to attach to your 1040 this tax season. It’s where you’ll actually calculate the deduction for the "half" portion of your time-and-a-half.
- Talk to your state tax board. Remember, this is a federal law. States like California or New York haven't all agreed to follow suit yet. You might still owe state income tax on that overtime even if the federal government says it's free.
The "no tax on overtime" era is officially here, but it's a messy start. Being proactive with your paperwork this month is the only way to ensure that "One Big Beautiful Bill" actually puts a beautiful amount of cash back in your pocket.