No Tax on Overtime: A New Federal Deduction for Workers
The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, introduced a significant new tax benefit for millions of American workers: a federal income tax deduction for qualifying overtime pay. This provision will be effective for the years 2025 through 2028.
Eligibility and Deduction Limits
The deduction is available to W-2 employees who are classified as non-exempt under the Fair Labor Standards Act (FLSA)—in other words, workers who are eligible for overtime pay. Self-employed individuals and exempt employees are not eligible. This will be an above-the-line deduction for qualified overtime pay, meaning it reduces taxable income whether or not a taxpayer itemizes deductions. Taxpayers can deduct up to $12,500 of qualifying overtime pay from their taxable income each year. For married couples filing jointly, the deduction increases to $25,000 if both spouses qualify. The deduction phases out for individuals with modified adjusted gross income (MAGI) over $150,000 and for joint filers over $300,000.
The deduction applies specifically to the “premium” portion of overtime pay—that is, the additional 50% paid for hours worked beyond 40 in a week. For example, if an employee earns $20 per hour, the $10 per hour overtime premium (the “half” in time-and-a-half) would be eligible for the deduction.
Reporting and Implementation
To qualify, the overtime must be reported on a W-2 or other IRS-approved statement. Further guidance on reporting requirements is expected, and employers are encouraged to begin tracking qualifying overtime separately in anticipation of future IRS instructions.
