The One Big Beautiful Bill Act created what is commonly called the “no tax on overtime” deduction, and it is now law for tax years 2025 through 2028.1Internal Revenue Service. One, Big, Beautiful Bill Act: Tax Deductions for Working Americans and Seniors The name oversells what the provision actually does. It does not exempt your overtime paycheck from taxes. It lets you deduct the premium portion of your overtime pay, up to $12,500 a year if you file single or $25,000 if you file jointly, from your federal taxable income. The deduction is retroactive to the start of 2025, so overtime you have already worked this year counts.
What Actually Gets Deducted
The deductible amount is the “extra half” in time-and-a-half, not the full overtime wage. Under the Fair Labor Standards Act, employers must pay at least one and one-half times your regular rate for hours worked beyond 40 in a week.2Office of the Law Revision Counsel. 29 U.S. Code 207 – Maximum Hours Only the half-time premium qualifies for the deduction.3Internal Revenue Service. Questions and Answers About the New Deduction for Qualified Overtime Compensation
An example makes it concrete. If your regular rate is $20 per hour, your overtime rate is $30. The deductible piece is the $10 premium, not the full $30. Ten overtime hours in a week produces a $100 deduction that week. If your employer voluntarily pays double time or another higher rate, the deduction is still capped at the FLSA-required half-time premium.3Internal Revenue Service. Questions and Answers About the New Deduction for Qualified Overtime Compensation
Who Qualifies
Two things have to line up: your classification under federal wage law, and your income.
You Have to Be FLSA Non-Exempt
The deduction is available only to workers entitled to overtime pay under the FLSA. These are called “non-exempt” employees and include most hourly workers in manufacturing, retail, healthcare, construction, and food service. Roughly 20 million workers regularly work overtime hours.4The White House. The One Big Beautiful Bill
“Exempt” workers do not qualify. Exempt status generally requires earning a salary at or above a threshold set by the Department of Labor and performing executive, administrative, or professional duties. The Department of Labor is currently enforcing a salary threshold of $684 per week after a federal court in Texas vacated a 2024 rule that would have raised it to $844.5U.S. Department of Labor. Earnings Thresholds for the Executive, Administrative, and Professional Exemption
Being salaried does not automatically make you exempt. Salaried employees who earn below the threshold, or whose duties do not fit the exempt categories, are still non-exempt and entitled to overtime.6U.S. Department of Labor. Overtime Pay Those workers can claim the deduction. Job title alone does not decide the question.
Income Phase-Outs
Higher earners lose part or all of the deduction. For single filers, it starts phasing out at $150,000 in modified adjusted gross income and disappears at $275,000. For joint filers, phase-out runs from $300,000 to $550,000. The reduction is $100 of deduction for every $1,000 over the threshold. Married couples who file separately cannot claim the deduction at all.3Internal Revenue Service. Questions and Answers About the New Deduction for Qualified Overtime Compensation
How Much You Might Save
The annual cap is $12,500 for single filers and $25,000 for joint filers.1Internal Revenue Service. One, Big, Beautiful Bill Act: Tax Deductions for Working Americans and Seniors Because this is a deduction, not a credit, it lowers your taxable income rather than your tax bill dollar-for-dollar. Your actual savings depend on your bracket. A worker in the 22% bracket who claims the full $12,500 saves about $2,750 in federal income tax. The White House puts the average benefit at roughly $1,400 per year.4The White House. The One Big Beautiful Bill
Reaching the cap takes a lot of overtime. At $20 per hour regular pay, the $10 premium would require 1,250 overtime hours in a year, or about 24 extra hours every week. Most workers will claim well under the cap. A nurse earning $35 per hour who works 10 overtime hours a week generates about $9,100 in deductible premium annually, worth roughly $2,000 in federal tax at a 22% bracket. A construction worker at $25 per hour with 5 overtime hours a week sees about half that. Most eligible workers should expect somewhere between $500 and $2,000 in federal tax savings per year.
What Still Gets Taxed on Your Overtime
The deduction affects federal income tax only. Social Security and Medicare taxes still come out of every overtime dollar. Your employer must continue withholding 6.2% for Social Security on wages up to $184,500 in 2026 and 1.45% for Medicare on all wages, with no cap.7Social Security Administration. Contribution and Benefit Base The law did not change payroll tax rules.8Office of the Law Revision Counsel. 26 U.S.C. 3101 – Rate of Tax
State income tax is separate. Unless your state conforms to this federal provision, your overtime premium is still fully taxable on your state return.
How to Claim It
You can take the deduction whether you itemize or take the standard deduction.9Internal Revenue Service. How to Take Advantage of No Tax on Tips and Overtime
For 2025, the deduction is retroactive. Because the law passed mid-year, most employers did not separately report the overtime premium on W-2s. The IRS lets you calculate the amount yourself using the methods in Notice 2025-69 and the instructions for Schedule 1-A on Form 1040.3Internal Revenue Service. Questions and Answers About the New Deduction for Qualified Overtime Compensation Keep the pay stubs that show your overtime hours and rate. They are your backup if the IRS questions your figure.
Starting in 2026, employers must separately report qualified overtime compensation on your W-2, or on 1099-NEC or 1099-MISC forms for contract work.3Internal Revenue Service. Questions and Answers About the New Deduction for Qualified Overtime Compensation The IRS also plans to update withholding for 2026, which should mean slightly higher take-home pay on each paycheck rather than waiting for a refund at tax time.
The Deduction Expires After 2028
This benefit is temporary. It applies to tax years 2025 through 2028 and sunsets unless Congress extends it.1Internal Revenue Service. One, Big, Beautiful Bill Act: Tax Deductions for Working Americans and Seniors If you build a financial plan around it, do not assume it will be there in 2029.
Watch Out for Pay Restructuring
The most obvious way to game this deduction would be for an employer to cut your base hourly rate and shift more of your pay into overtime hours, keeping your total roughly the same while enlarging the deductible premium. The law authorizes the Treasury Secretary to issue anti-abuse regulations, and the IRS has already stated that only FLSA-required overtime premiums qualify. Employers cannot record fictitious overtime hours engineered to hit a target weekly pay.3Internal Revenue Service. Questions and Answers About the New Deduction for Qualified Overtime Compensation
Reclassifying salaried exempt employees to hourly non-exempt status solely to manufacture deductible overtime carries real legal risk. Hours must be tracked accurately and the overtime calculation must reflect real hours worked. If your employer proposes rewriting your pay arrangement around this deduction, talk to an accountant or an employment attorney before you agree.