The One Big Beautiful Bill Act (Public Law 119‑21), enacted July 4, 2025, created a temporary federal income tax deduction for certain overtime compensation earned in tax years 2025 through 2028.
This provision has sometimes been described as “no tax on overtime.” That description is not accurate. The law does not exclude overtime wages from income and does not eliminate payroll taxes. Instead, it allows eligible taxpayers to claim a limited above‑the‑line deduction for qualifying overtime premium pay when filing their federal income tax return.
Who May Qualify
The deduction applies only to overtime compensation that is required under the federal Fair Labor Standards Act (FLSA). In most hourly arrangements, FLSA requires pay at 1.5 times the regular rate for hours worked over 40 in a workweek.
Only the premium portion of that overtime pay qualifies for the deduction. In a straightforward time‑and‑a‑half structure, this is generally the additional 0.5× amount above the employee’s regular rate.
Employees who are exempt from FLSA overtime rules (such as many salaried professionals) are not eligible for this deduction, even if their employer provides additional compensation for extra hours worked.
Overtime required solely under state law or contractual arrangements does not qualify unless it also satisfies federal FLSA requirements.
Deduction Limits and Income Phase‑Out
Maximum annual deduction:
- $12,500 for Single or Head of Household filers
- $25,000 for Married Filing Jointly
The deduction begins to phase out once Modified Adjusted Gross Income (MAGI) exceeds $150,000 for single filers or $300,000 for joint filers.
The deduction is claimed above the line, meaning it is available whether or not a taxpayer itemizes deductions.
Important Considerations
- Overtime wages remain subject to Social Security and Medicare taxes.
- The deduction affects federal income tax only; state treatment may differ.
- The provision is scheduled to expire after 2028 unless extended by Congress.
- Calculating the eligible premium portion can be complex in situations involving bonuses, shift differentials, blended rates, or other compensation structures.
Employer Reporting
For the 2025 tax year, employers are not required to separately report qualifying overtime premiums on Forms W‑2 due to current form limitations. Employees may need to rely on detailed payroll records.
Beginning in 2026, Treasury is expected to implement separate reporting requirements. Guidance and form revisions are still developing.
A Note on Guidance
This summary reflects the statute as enacted and currently understood. Treasury regulations and IRS guidance may further clarify definitions, calculation methods, and reporting procedures.
This article is provided for general informational purposes and is not a substitute for individualized tax advice.
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