If you’ve ever worked late nights, weekends, or double shifts, you’re likely very familiar with overtime pay. But the benefits just got better — as of 2025, there’s a new tax break designed specifically for those who work overtime. A provision in the One Big Beautiful Bill, referred to as the no tax on overtime deduction, could put some of the money you made from overtime hours back in your pocket this tax season.
Whether you’re hustling late-night shifts, working weekends, or clocking extra hours to make ends meet, here’s everything you need to know about the new overtime deduction and how TaxAct® can help you claim it on your tax return this year.
Note: The One Big Beautiful Bill (OBBB) is now also being referred to by lawmakers as the Working Families Tax Cut Act. You may see one or both names used here, but they refer to the same set of tax changes.
Did the no tax on overtime pass?
Yes. The no tax on overtime bill was included in the One Big Beautiful Bill that President Trump signed into law in July 2025. This new law creates a first-of-its-kind tax exemption for certain overtime pay, effective beginning in tax year 2025.
Although no tax on overtime passed, we are still awaiting the IRS to provide final regulations that finalize some details, such as whether contractors qualify for the deduction. We will update this page with new information as it becomes available.
When does no tax on overtime start?
The no tax on overtime deduction begins with the 2025 tax year. That means you’ll first claim it when you file your tax return in early 2026. However, the provision is not permanent. Under the current law, this new deduction is scheduled to remain in place through the end of 2028 unless Congress decides to extend or modify it.
How does no tax on overtime work?
Here’s what you need to know about the One Big Beautiful Bill no tax on overtime deduction:
| No tax on overtime rule | What it means | Example |
|---|---|---|
| Deduction amount | You can deduct up to $12,500 of qualified overtime compensation per year ($25,000 if filing a joint return). | A single filer who earns $8,000 in qualified overtime can deduct the full $8,000 since it’s under the $12,500 cap. |
| Type of deduction | Above the line, meaning you don’t need to itemize to claim it. It lowers your adjusted gross income (AGI) directly. | If your AGI is $60,000, and you deduct $5,000 of overtime, your AGI becomes $55,000. |
| SSN requirement | You must have a valid Social Security number to claim the deduction. | If you don’t have an SSN, you cannot claim the deduction (even if you worked overtime). |
| Filing status | Married filing separately taxpayers are not eligible. | A married taxpayer with $10,000 of overtime who files separately from their spouse cannot claim this deduction. |
| Income limit (MAGI) | Deduction begins to phase out for those with a modified adjusted gross income (MAGI) above $150,000 ($300,000 for joint filers). | A couple with MAGI of $200,000 will be able to claim the full deduction because they are under the joint limit. |
| Phaseout | For every $1,000 over the MAGI limit, the deduction is reduced by $100. | A single filer with a MAGI of $155,000 can claim a max deduction of $12,000 since they are $5,000 over the limit. |
| Time-and-a-half portion only | Only the “extra” half above your base rate qualifies. | If your normal rate is $20 per hour and you’re paid $30 per hour (or more) for overtime, only the $10 per hour 1.5x extra pay is deductible. |
| Tips during overtime | Tips earned during overtime hours do not qualify. (Instead, you may qualify for the no tax on tips deduction.) | If you made $500 in tips while working overtime, those tips should be deducted under the no tax on tips deduction rather than included in your overtime pay. |
Who qualifies for no tax on overtime deduction?
The deduction applies to most taxpayers who receive overtime wages under the Fair Labor Standards Act (FLSA). That means:
- Hourly and other non-exempt employees are eligible for this benefit.
- Exempt salaried employees generally do not qualify for this deduction, since they don’t receive overtime under FLSA rules. Non-exempt salaried employees can still qualify, since they are entitled to overtime protections.
- You must have overtime earnings paid at a higher rate than your regular wages.
- A valid Social Security number is required.
- It’s still unclear whether self-employed workers like independent contractors will qualify — as of right now, you’ll still report business income and expenses normally on Schedule C.
How much overtime pay can be deducted?
You can claim up to $12,500 of qualifying overtime pay on a single return, or up to $25,000 if you’re filing jointly with your spouse.
Remember, this applies only to the “extra” portion of your overtime compensation (the half-pay above your base rate). If you earn straight-time bonuses, tips, or hazard pay, those don’t qualify for the overtime deduction.
2025 safe harbor rule
There’s also a one-year safe harbor rule (just for 2025) that lets employers average your overtime hours from the second half of the year (July to December) to figure your deduction. This rule is meant to ease the transition into the new overtime tax law, which was not passed until halfway through the 2025 tax year.
Reporting requirements for overtime pay
Beginning in tax year 2026, employers will be required to separately report qualified overtime compensation on Form W-2 and other IRS information returns.
For 2025, however, employers are not required to provide this separate breakdown, and the IRS is providing penalty relief for employers and payors who are not able to report these figures. That means your overtime premium may appear in different places depending on your employer’s payroll system. Some may:
- Report it in box 14 (Other) on your W-2,
- Include it on a year-end earnings statement, or
- Provide no separate line at all, leaving you to calculate your deductible overtime using your pay stubs or payroll records.
Because of this transitional year, the IRS allows several reasonable methods for calculating your deduction, which we cover in the next section.
How to calculate your overtime deduction
For tax year 2025, employers are not yet required to provide a separate line on Form W-2 identifying your “qualified overtime compensation.” That means many workers won’t receive a clear breakdown of the portion of their overtime pay that counts toward this new deduction.
Thankfully, the IRS allows you to calculate your deductible overtime using the information you do have, such as pay stubs, year-end payroll summaries, employer statements, or other documentation.
Here’s a step-by-step guide to figuring out your qualified overtime compensation for 2025.
Step 1: Understand what counts as deductible overtime.
Only the overtime pay that is required by federal law — a.k.a. the “extra half” in time-and-a-half pay — qualifies for the deduction.
For most workers covered by the Fair Labor Standards Act (FLSA):
- Your regular rate = normal hourly pay
- Your overtime rate = 1.5x your regular rate
- Your deductible portion (overtime premium) = the extra 0.5x regular rate
No matter how much your employer pays you for overtime — time-and-a-half, double time, holiday rates, or more — only the 0.5x legally required premium is deductible. So your total overtime pay may go up, but the deductible part stays the same.
Examples:
- If you normally earn $20 per hour and are paid $30 per hour for overtime, only the extra $10 per hour counts toward the deduction.
- If you earn double time at $40 per hour, the deductible portion is still only $10 per hour — the same 0.5x premium required by FLSA.
Step 2: Check whether your employer gave you a separate overtime breakdown.
In 2025, some employers may voluntarily list your overtime premium amount. This could be reported in Form W-2, box 14, or on a separate year-end payroll statement.
If your employer provides this breakdown, you can simply use that amount for your deduction. But if they don’t, proceed to the next step — the IRS allows several “reasonable methods” to figure it out.
Step 3: Use one of the IRS-approved reasonable methods.
When you’re paid time-and-a-half
If your pay stub breaks out the overtime premium separately, you can simply use the listed premium amount for your deduction.
Example:
Jerome’s payroll statement lists an “overtime premium” of $5,000 for 2025. He can use the full $5,000 as his qualified overtime compensation.
If your statement shows a single combined overtime amount, the IRS allows you to use one-third of that total to estimate the deductible premium.
Example:
Katrina’s pay stub lists a combined overtime amount of $15,000 in 2025. Since this amount includes her regular wages along with the 0.5x overtime premium, she divides by 3 to calculate her deductible portion: $15,000 ÷ 3 = $5,000 deductible.
When you’re paid double time or a higher overtime rate
If your pay stub breaks out the overtime premium separately, you’ll divide that premium by the appropriate number to determine the deductible portion:
- If you earned double time, divide the number your employer gave you by 2
- For triple time, divide by 3 (and so on)
Example:
Nina earns double her regular rate for the overtime hours she works. Her pay stub shows an overtime premium of $10,000. To calculate her deductible portion, she will divide by half: $10,000 ÷ 2 = $5,000 deductible.
If your paystub instead shows a combined double-time total, you can use one-fourth of the total to calculate your deductible overtime. For triple time, use one-sixth, and so on.
Example:
Amir earns double time for his overtime hours, and his pay stub shows a total of $20,000 in overtime pay for 2025. To calculate his deduction, he divides by 4: $20,000 ÷ 4 = $5,000 deductible.
For law enforcement, fire protection, hospital workers, or others covered by special FLSA rules
Some workers calculate overtime based on alternate work periods (like a 14-day cycle) or may receive compensatory time payouts at a later date.
If you are paid overtime under a 14-day work period system, you can generally deduct one-third of your overtime compensation (unless your employer provides the premium separately).
Example:
Natalia works in law enforcement and receives $15,000 in overtime pay calculated over a 14-day work period. Her deductible amount is: $15,000 ÷ 3 = $5,000.
As another example, public-sector workers may receive wages later for comp time they’ve earned. If you receive comp-time payouts, you may also deduct one-third of the comp-time payout (unless your employer provides the premium separately).
Example:
Mike works for a local government agency and receives $4,500 of comp-time payout wages in 2025. His deductible portion is: $4,500 ÷ 3 = $1,500.
Real-world example: Calculating your overtime deduction across a full year
To see how the deduction can add up over time, let’s look at a typical hourly employee scenario.
Maria is a non-exempt full-time employee who earns $20 per hour. In 2025, she works an extra 10 hours of overtime each week at time and a half, which means she earns $30 per hour for those overtime hours.
Here’s how she would calculate her overtime deduction:
- Her regular pay stays at $20 per hour.
- Her overtime rate is $30 per hour, but only the extra $10 per hour (the half above her base rate) counts toward the deduction.
- Over 10 overtime hours, that’s $100 in deductible overtime per week.
- If she works overtime every week of the year, her deductible overtime totals $5,200 (52 weeks x $100).
Maria can claim that $5,200 as an above-the-line deduction on her 2025 tax return, lowering her adjusted gross income. If her spouse also qualifies and they file jointly, their combined deduction could be as high as $25,000, depending on the amount of overtime they both worked.
How to claim the no tax on overtime deduction with TaxAct
When you file your tax return for the 2025 tax year, TaxAct will walk you through entering your overtime compensation. You’ll simply enter your information from Form W-2 or your pay stubs, and our tax prep software will apply the deduction automatically if you qualify. To do this, we’ll use a new tax form called Schedule 1-A (Form 1040).
So you don’t need to worry about figuring it all out on your own — TaxAct will help guide you through the reporting process step by step.
FAQs about the no tax on overtime deduction
The bottom line
The no tax on overtime deduction is a major new tax break for millions of working Americans. By cutting federal taxes on extra hours, the new law means more money in your pocket when you put in overtime.
Want to learn more about this tax break, plus other Working Family Tax Cuts changes? Watch our video for more answers to your tax questions.
If you earn overtime wages, make sure you understand the no tax on overtime income limits and know how much of your overtime compensation qualifies. Come tax season, TaxAct will guide you through the steps to claim this deduction and help you keep more of your hard-earned overtime pay.
This article is for informational purposes only and not legal or financial advice.
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