"No Tax on Overtime"
- Admin Team
- Jan 18
- 2 min read
The new tax law regarding overtime pay, enacted as part of the "One Big Beautiful Bill" in July 2025, significantly changes how overtime is taxed for many workers.
The most important thing to know is that while the law is often called "No Tax on Overtime," it is technically a federal income tax deduction for a specific portion of your overtime pay.
1. What exactly is tax-free?
Only the "extra half" of your "time-and-a-half" pay is deductible.
The Regular Part: If you make $20/hour normally, the first $20 of your overtime rate is still taxed like normal wages.
The Extra Part: The extra $10 (the "half" in time-and-a-half) is what you can deduct from your taxable income.
Note: Even if your employer pays you "double time," the law only allows you to deduct the amount required by federal law (usually the 0.5x premium).
2. Who is eligible?
Non-Exempt Workers: You must be an hourly or non-exempt employee covered by the Fair Labor Standards Act (FLSA). Most salaried "exempt" professionals do not qualify because they don't legally receive FLSA overtime.
Income Limits: The deduction starts to "phase out" (gradually disappear) if you earn more than $150,000(single) or $300,000 (married filing jointly).
Caps: You can deduct up to $12,500 per year ($25,000 for married couples).
3. Important Limitations
Federal Income Tax Only: You still have to pay Social Security and Medicare (FICA) taxes on all your overtime. This law only lowers your income tax.
State Taxes: This is a federal law. Unless your specific state passes its own version, you may still owe state income tax on that overtime pay.
Temporary: Currently, this law is only set to last from 2025 through 2028.
4. How do you claim it?
For 2025 Taxes (filed in early 2026): Because the law was passed mid-year, the IRS is allowing "reasonable estimates." Your employer might list the amount in Box 14 of your W-2 or provide a separate statement.
For 2026 Taxes and beyond: Employers will be required to track this specifically. Look for a new code (likely "TT") in Box 12 of your W-2 to see exactly how much you can deduct.
To schedule a 15 complimentary consultation please visit our scheduling portal.
Comments