No Tax on Overtime: Your Unbiased Guide
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The No Tax on Overtime provision represents one of the most significant changes to how working Americans are taxed in recent years. For professionals who frequently put in extra hours, understanding this new deduction could mean substantial tax savings when filing returns.
No Tax on Overtime Bill Details
The No Tax on Overtime provision became law on July 4, 2025, as part of the One Big Beautiful Bill Act (OBBBA), a sweeping tax reform package signed by President Trump. Under this legislation, eligible workers can now deduct qualified overtime compensation from their federal taxable income, reducing their overall tax burden.
The provision allows single filers to deduct up to $12,500 in qualified overtime pay annually, while married couples filing jointly can deduct up to $25,000. This deduction applies only to federal income tax. Workers will still owe Social Security and Medicare taxes on their overtime earnings, and state and local tax treatment may vary.
One important distinction: The deduction applies only to the premium portion of overtime pay. For workers paid time-and-a-half, only the "extra half" above the regular rate qualifies. If someone earns $20 per hour normally and $30 per hour for overtime, only the additional $10 per hour is eligible for the deduction.
Why it matters: This provision directly reduces taxable income for millions of workers, potentially saving hundreds or thousands of dollars annually.
When the No Tax on Overtime Bill Starts
Although the bill was signed in July 2025, the No Tax on Overtime provision retroactively took effect on January 1, 2025. This means overtime compensation earned at any point during the 2025 calendar year qualifies for the new deduction. Workers will first claim this benefit when filing their 2025 tax returns in early 2026.
The provision is currently scheduled to remain in effect through December 31, 2028, though Congress may choose to extend it. This four-year window aligns with the end of President Trump's current term, and its continuation beyond 2028 will depend on future legislative action.
For the 2025 tax year, the IRS designated this period as a transition year. Employers were not required to use revised W-2 forms to separately report qualified overtime compensation. The IRS granted broad relief allowing businesses to use any reasonable method to track and report overtime income during 2025.
Starting with tax year 2026, employers will be required to separately report qualified overtime compensation on Form W-2, with the code "TT" appearing in box 12.
Why it matters: The retroactive effective date means workers who earned overtime throughout 2025 can claim this benefit immediately.
No Tax on Overtime Limits
The No Tax on Overtime deduction includes income-based limitations that phase out the benefit for higher earners.
For single filers, the phaseout begins at a modified adjusted gross income (MAGI) of $150,000. For married couples filing jointly, the phaseout threshold is $300,000. Above these thresholds, the deduction is reduced by $100 for every $1,000 of additional income.
To illustrate: A single filer earning $155,000 in MAGI would have their maximum deduction reduced from $12,500 to $12,000 because they are $5,000 over the threshold. The deduction completely phases out at $275,000 for single filers and $550,000 for married couples filing jointly. Workers earning above these upper limits cannot claim any portion of the deduction.
These thresholds are particularly relevant for professionals in high-compensation fields like technology, finance, or healthcare who may approach or exceed these limits. Planning around these phaseouts can optimize tax strategy for those near the edges of eligibility.
Why it matters: Income limits determine whether workers receive the full benefit, a reduced amount, or no deduction at all.
Who Qualifies for the Deduction?
The No Tax on Overtime deduction applies to workers who meet several criteria under the Fair Labor Standards Act (FLSA).
Non-exempt employees are the primary beneficiaries. These workers are entitled to overtime pay when working more than 40 hours in a given week. Non-exempt employees are often hourly workers, though some salaried employees earning under $684 per week also fall into this category. The deduction requires workers to receive a W-2 or 1099 documenting their earnings.
Exempt employees, such as salaried professionals who do not receive overtime pay under FLSA rules, are not eligible for this deduction. The distinction between exempt and non-exempt status is governed by Department of Labor regulations and depends on factors including job duties, salary level, and payment structure.
Additional eligibility requirements include having a valid Social Security number and, for married taxpayers, filing jointly rather than separately. The deduction is not available to married individuals who file separate returns.
Self-employed workers and independent contractors face uncertainty. As of early 2026, the IRS had not provided final regulations clarifying whether these workers qualify, and updated guidance is expected.
Why it matters: Eligibility requirements are specific, and not all workers who log extra hours will qualify.
How the Deduction Works in Practice
Why it matters: Understanding the mechanics helps workers and their advisors calculate expected savings accurately.
The No Tax on Overtime functions as an above-the-line deduction, meaning workers can claim it without itemizing their other deductions. They can take both the standard deduction and the overtime deduction.
Calculating qualified overtime compensation requires identifying only the premium portion of overtime pay. For a worker earning $15,000 in total annual overtime pay, only one-third of that amount (the premium portion, or $5,000) would qualify for the deduction. The base rate portion remains fully taxable.
For 2025, the IRS allowed several reasonable methods for calculating the deduction. Employers might report qualified overtime compensation in Box 14 of the W-2 or provide the information on an attached statement. Some employers may not provide a separate breakdown, requiring workers to calculate their deductible overtime using pay stubs or payroll records.
When filing, workers complete Schedule 1A Parts I and III, listing their MAGI and qualified overtime compensation [cite:page:0]. The deduction amount flows to line 13b of Form 1040 and reduces taxable income accordingly.
One technical note: This deduction is "below the line," meaning it does not reduce adjusted gross income (AGI) [cite:page:0]. AGI determines eligibility for various other deductions, tax credits, and Roth IRA contribution limits. Workers should factor this distinction into their broader tax planning.
Tax Planning Considerations for Working Professionals
For professionals who regularly work overtime, several planning strategies warrant consideration.
Track overtime hours and compensation carefully throughout the year. While employers will eventually be required to separately report qualified overtime, maintaining personal records ensures accurate deduction calculations and provides documentation if questions arise.
Understand the interaction with other deductions. Workers who also earn tips may be eligible for both the No Tax on Overtime deduction and the separate No Tax on Tips deduction, which allows up to $25,000 in qualified tip income to be deducted. Tips earned during overtime hours should be claimed under the tips provision, not the overtime provision.
Consider the income phaseout thresholds when making other financial decisions. For workers near the $150,000 (single) or $300,000 (joint) MAGI limits, contributing to pre-tax retirement accounts like 401(k) plans can reduce MAGI and preserve more of the overtime deduction.
State tax treatment varies. The federal deduction does not automatically apply to state income taxes, so workers should consult state-specific guidance or a tax professional to understand their total tax picture.
For those who anticipate significant overtime income, quarterly estimated tax payments may need adjustment to reflect the expected deduction. Working with a fee-only financial advisor or tax professional can help optimize these decisions within a broader financial plan.
What Employers Are Required to Do
Employers play a key role in implementing this provision, though their specific obligations evolve over time.
For tax year 2025, the IRS provided transitional relief and did not penalize employers who did not separately report qualified overtime compensation. Employers could use existing payroll systems and internal records while preparing for updated reporting formats.
Beginning with tax year 2026, employers will be required to separately identify and report qualified overtime compensation on Form W-2. Updated forms and instructions are expected later in 2026. Some employers have already begun tracking overtime premiums separately in anticipation of these requirements.
Workers should proactively communicate with their payroll departments to understand how overtime information will be provided and ensure they have the documentation needed to claim the deduction accurately.
The No Tax on Overtime provision offers meaningful tax relief for workers who put in extra hours. For young professionals building their careers, understanding the rules, limits, and planning opportunities can translate directly into financial benefit.
Why it matters: Understanding employer obligations helps workers know what information to expect and when.
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References
What is No Tax on Overtime and how does it work? | Fidelity - No Tax on Overtime is a tax deduction of up to $12500 on qualified overtime compensation for certain...
FAQs for OBBBA No Tax on Overtime Provision - News - Illinois State - It allows eligible workers to deduct up to $12,500 (or $25,000 for joint filers) of qualified overti...
No Tax on Overtime Pay: Complete Guide For 2025 and Beyond - No tax on overtime retroactively begins on Jan. 1, 2025, and will remain in place through 2028. This...
One Big Beautiful Bill: No Tax on Overtime pay explained (2025-2028) - Starting January 1, 2025, a designated amount of qualifying overtime pay will be exempt from federal...
[PDF] No Tax on OT Fact Sheet - overtime from their federal taxable income. Eligible employees can deduct up to: $12,500 annually (S...
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No Tax On Overtime Explained - TaxAct Blog - The no tax on overtime deduction begins with the 2025 tax year. That means you'll first claim it whe...
What Employers Should Know About the “No Tax on Overtime ... - Eligible employees can claim the deduction on their federal tax returns starting with the tax year 2...
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No Tax on Tips | 2026 Rules for Employees and Employers - Similarly, employees may deduct overtime income earned. The maximum annual deduction is $12,500 for ...
New Federal Tax Reporting Requirements for Overtime Compensation - For federal tax purposes, overtime compensation remains taxable wages unless a specific exclusion ap...
New IRS Guidance on Overtime and Tip Reporting Under the OBBBA - Although the OBBA's overtime and tip reporting requirements are not in effect until 2026 ... The OBB...
