What the “No Tax on Overtime” Provision Means for Workers and Businesses in 2025 and Beyond

The new “No Tax on Overtime” deduction is one of the most talked-about provisions under the One Big Beautiful Bill Act (OBBBA), signed into law in 2025. OBBBA introduced a suite of tax changes that impact both workers and employers. This new “No Tax on Overtime” deduction was designed to lessen the tax burden for employees when working extra hours.

Below is a comprehensive overview of what this means for employers and employees, what overtime pay qualifies, and how you might benefit as soon as this tax season.

What Is the “No Tax on Overtime” Deduction?

Under the OBBBA, for tax years 2025 through 2028, most workers can claim a new federal income tax deduction for qualified overtime compensation. Instead of taxing all overtime wages as ordinary income, the law allows eligible taxpayers to deduct a portion of that overtime from federal taxable income. If you are an employee working overtime, that means more of your hard-earned overtime stays in your pocket by potentially lowering your overall tax bill.

How the Overtime Deduction Works

Below are the key features of the “No Tax on Overtime” provision:

• Deduction limits: Individual taxpayers can deduct up to $12,500 of qualified overtime pay ($25,000 if married filing jointly, but the limit of $12,500 per person applies).
• Definition of qualified overtime: Qualified overtime pay is defined using the Fair Labor Standards Act (FLSA), which states that overtime is the excess an employer pays over an employee’s regular rate of pay.
• Deductible portion only: The only portion that qualifies for the deduction is the excess (e.g., If overtime pay is 1.5x regular pay, only the 50% portion is deductible).
• Above-the-line deduction: The deduction lowers adjusted gross income (AGI), meaning both taxpayers who claim the standard deduction and those who itemize can benefit from the deduction.
• Income phase-out: The deduction begins to phase out at modified adjusted gross incomes above $150,000 (or $300,000 for joint filers).

How it Will Apply to 2025

The deduction applies to overtime earned on or after January 1, 2025. The IRS has announced that 2025 Forms W-2 will not separately identify regular pay versus overtime pay.

 As a result, employees who wish to claim this deduction in 2025 should:

1. Determine whether they are FLSA-eligible. Non-exempt employees who earn overtime after working more than 40 hours per week are typically eligible.
   
2. Use reliable records—such as pay stubs, time sheets, or employer payroll reports—to track regular wages versus overtime pay.

How it Will Apply to 2026 and Beyond

The deduction is currently scheduled to remain in place through December 31, 2028, unless extended by Congress.

Beginning January 1, 2026, employers are expected to have systems in place to properly track regular pay and overtime pay. For overtime earned during the 2026 calendar year, the Form W-2 issued in January 2027 is expected to report overtime amounts separately.

Next Steps

As with all tax changes, the details matter — and we’re here to help you make the most of them.

If you have questions about how this provision affects your situation as an employee or employer, please contact TrueBlaze Accounting & Tax, and let us guide you through the process.