No Tax on Overtime Bill Passed: Who Qualifies and Deduction Caps

The No Tax on Overtime bill is now law, but it does not make overtime tax-free. President Trump signed the One, Big, Beautiful Bill Act (H.R. 1) on July 4, 2025, creating a new federal income tax deduction for qualified overtime pay under Internal Revenue Code Section 225.¹ The deduction is available for tax years 2025 through 2028 and caps out at $12,500 per year for single filers or $25,000 for joint filers.² The details matter more than the headline suggests, because the law doesn’t work the way most people assume.

What the Law Actually Does

The bill creates a tax deduction, which reduces your taxable income by the amount of qualifying overtime pay. That is not the same as removing the tax. An exclusion would take overtime out of your income entirely, as if you never earned it. A deduction just shrinks the amount of income the IRS uses to calculate what you owe. Your overtime still appears as wages, still gets reported on your W-2, and still factors into your adjusted gross income.²

The second detail most people miss: only the premium portion of overtime qualifies. When you work overtime, you earn time-and-a-half, meaning 1.5 times your regular hourly rate. Only the extra half counts toward the deduction, not the full overtime pay. If your regular rate is $30 per hour and you work 10 overtime hours, your overtime check is $450 (10 hours × $45). The qualified overtime compensation is just $150, the premium half (10 hours × $15). The $300 representing your base rate for those hours is taxed normally.³

If your employer pays double-time for holidays or certain shifts, only the portion the Fair Labor Standards Act requires counts. The FLSA mandates time-and-a-half, so anything above that is voluntary employer generosity and doesn’t qualify for the deduction.³

Who Qualifies

Eligibility hinges on the Fair Labor Standards Act. You must be both covered by the FLSA and classified as non-exempt from its overtime requirements. In practice, that means hourly workers who receive time-and-a-half for hours over 40 in a workweek.⁴ Whether you meet those criteria depends on your occupation, duties, and earnings, and the IRS has said this is a fact-specific determination for each worker.³

Several categories of workers are left out, and some of them will be surprised:

Overtime required by a state law but not by the FLSA does not qualify.
Overtime guaranteed by a union contract but not mandated by the FLSA does not qualify.
Agricultural workers and others specifically exempt from FLSA overtime rules are excluded entirely.
Salaried employees classified as exempt under the FLSA get nothing from this deduction regardless of how many hours they work.

Two filing requirements apply on top of FLSA eligibility. You must include your Social Security number on your return, and if you are married, you must file jointly to claim the deduction.²

Deduction Caps and Income Phaseout

The deduction has a hard annual cap: $12,500 for single filers and $25,000 for married couples filing jointly. Even if your qualified overtime premium exceeds those amounts, you cannot deduct more than the cap allows.⁵

An income-based phaseout further limits the benefit for higher earners. Once your modified adjusted gross income crosses $150,000 ($300,000 for joint filers), the deduction shrinks by $100 for every $1,000 above that threshold. For a single filer claiming the full $12,500, the deduction disappears entirely at $275,000 of modified AGI. For joint filers claiming $25,000, it vanishes at $550,000.⁵

The deduction is available whether you take the standard deduction or itemize, so you don’t have to choose between the two. That is a meaningful benefit for the majority of filers who don’t itemize.

How to Claim It

You will not see bigger paychecks just because this law passed. Employers still withhold federal income tax on your full overtime earnings during each pay period. The IRS has not changed the W-4 to let employees adjust withholding for this deduction. You claim the benefit when you file your annual tax return.⁶

The IRS has published Schedule 1-A, which attaches to your Form 1040. This is the form you use to calculate and claim the overtime deduction along with the other deductions created by the same law, including the deductions for tips, car loan interest, and the enhanced senior deduction.⁷

Filling out Schedule 1-A accurately means knowing how much qualified overtime compensation you earned. Starting with tax year 2026, employers are required to separately report this amount on your W-2.⁸ For the 2025 tax year, the reporting requirements were less formalized, so workers who earned overtime in 2025 may need to work with their employers or payroll records to identify the correct amount.

What Still Gets Taxed

The overtime deduction applies only to federal income tax. Social Security tax (6.2% on earnings up to the annual wage base) and Medicare tax (1.45% on all earnings) are still owed on every dollar of overtime, including the premium portion. Your employer continues to withhold these amounts and pays its matching share.⁹

That cuts two ways. Roughly 7.65% of your overtime pay still goes to payroll taxes with no deduction available. On the other side, because FICA taxes are still collected on overtime earnings, those earnings still count toward your Social Security benefit calculation. Your average indexed monthly earnings, which Social Security uses to determine your retirement benefit, are based on your total taxable wages for FICA purposes.¹⁰ Had the law created a true payroll tax exemption instead of an income tax deduction, overtime pay could have been excluded from those calculations, shrinking your future retirement checks. That didn’t happen.

State income tax is a separate question. How your state handles the overtime deduction depends on whether it automatically follows federal taxable income or maintains its own definitions. Some states with rolling conformity to federal tax law, including Iowa, Montana, North Dakota, and Oregon, automatically adopted the overtime deduction unless they passed legislation to opt out. Static conformity states like New York require taxpayers to add back the overtime deduction when calculating state taxable income, effectively keeping overtime fully taxed at the state level. California and Illinois have also declined to adopt the deduction. If you live in a state with income tax, check your state’s treatment before assuming your overtime is deductible on your state return.

When the Deduction Expires

The overtime tax deduction applies to tax years 2025 through 2028. After that, it sunsets automatically unless Congress passes new legislation to extend it.² Workers planning around this deduction as a permanent feature of the tax code could face a surprise in 2029, when overtime returns to being fully taxable at both the federal and state level.

For the four years the deduction exists, the practical savings depend on your tax bracket, how much overtime you work, and whether you hit the cap. A worker in the 22% bracket who maxes out the deduction saves $2,750 in federal income tax per year. A worker in the 12% bracket with $5,000 in qualified overtime premium saves $600. Run the math for your own situation before volunteering for extra shifts with the expectation of tax-free earnings that aren’t quite tax-free.

1
Congress.gov. H.R.1 – 119th Congress: An Act to Provide for Reconciliation
2
Internal Revenue Service. One, Big, Beautiful Bill Act: Tax Deductions for Working Americans and Seniors
3
Internal Revenue Service. Questions and Answers About the New Deduction for Qualified Overtime Compensation
4
U.S. Department of Labor. Overtime Pay
5
Office of the Law Revision Counsel. 26 USC 225 – Qualified Overtime Compensation
6
Internal Revenue Service. Treasury, IRS Provide Guidance for Individuals Who Received Tips or Overtime During Tax Year 2025
7
Internal Revenue Service. IRS Published Schedule Taxpayers Will Use to Claim Deductions on No Tax on Tips, No Tax on Overtime, No Tax on Car Loans, No Tax on Seniors
8
Congress.gov. H.R.1 – 119th Congress: Text
9
Internal Revenue Service. One, Big, Beautiful Bill Provisions
10
Social Security Administration. Social Security Benefit Amounts