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By Aliss Higham
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Working extra hours has always meant paying the same taxes on overtime as on regular wages, but a new law signed in July 2025 under President Donald Trump has changed how some overtime pay is treated for federal income tax for this tax filing season.
The One Big Beautiful Bill Act introduced a new deduction called No Tax on Overtime. While the name suggests overtime is now tax-free, the reality is more limited. The change allows some workers to reduce their taxable income, but only on a specific portion of their overtime pay and only if they meet certain rules.
Here’s what the new law actually does and who may benefit.
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What To Know
Under the new rule, workers who receive qualified overtime compensation may deduct the amount they earned above their regular pay rate. This deduction lowers taxable income, which can reduce federal income taxes or increase a refund.
Overtime must still be reported on a W-2, 1099, or another employer statement. The deduction is claimed when filing a tax return and does not change what appears on a paycheck.
As JustAnswer tax expert Joel Salas explained to Newsweek, “It's a deduction on income tax; it's not a tax-free paycheck.” He said many people wrongly assume the full overtime amount is excluded from taxes, adding, “They just think that whole income is tax-free, which isn't the case.”
The deduction also does not remove payroll taxes. Salas noted that “payroll taxes—FICA, [covering] Social Security, and Medicare—still apply.”
Tips earned during overtime hours cannot be used toward this deduction, although they may qualify under the separate No Tax on Tips provision.
There is still no special tax rate for overtime. Any portion that remains taxable is taxed at the worker’s regular income tax rate.
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Who Qualifies?
To claim the No Tax on Overtime deduction, workers must meet all of the following requirements:
- Workers must be legally entitled to overtime pay and receive a W-2 or 1099. Most are hourly workers, but some salaried employees earning under $684 per week may also qualify. The deduction is limited to qualified overtime pay under the Fair Labor Standards Act—meaning the time-and-a-half wages earned after working more than 40 hours in a single week.
- The deduction starts to phase out for single filers at $150,000 in modified adjusted gross income (MAGI) and for joint filers at $300,000. It is reduced by $100 for every $1,000 above those thresholds. Once MAGI reaches $275,000 for single filers or $550,000 for joint filers, the deduction is no longer available.
- The deduction is available to single filers, heads of household, and married couples filing jointly.
The deduction only applies to the overtime premium—the extra amount earned above a worker’s normal hourly rate.
Salas said that narrow definition limits the value of the tax break. “The deduction is tied to the actual overtime premium,” he said. “It's just the difference between the regular payroll rate and the one-and-a-half overtime rate, and that's what's actually getting discounted.”
He also warned the rule could be difficult to apply correctly, noting that identifying the overtime premium on year-end documents may be challenging because it does not appear separately on W-2 forms.
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