No Tax on Overtime

You may have heard buzz about a new law offering “no tax on overtime.” It’s a topic gaining a lot of attention, and for good reason. For millions of hourly workers in the United States, overtime pay is a crucial part of their income. The idea of not paying tax on it sounds like a significant financial win.

However, this trending topic is also surrounded by confusion and myths. Is overtime pay completely tax-free? Does everyone qualify? Does this mean your paycheck will be bigger right away? The short answer is that it’s more complex than it sounds. This law introduces a new federal income tax deduction, not a complete tax exemption.

Here, we will provide a clear, detailed explanation of what this new overtime tax rule really means for US workers between 2025 and 2028. You’ll learn what the law is, who qualifies, how to calculate the benefit, and how to claim it.

What Is No Tax on Overtime?

No Tax on Overtime is a term commonly used to describe a U.S. federal tax benefit that allows eligible workers to reduce how much income tax they pay on overtime earnings. It does not mean overtime pay is completely tax-free or that taxes disappear from your paycheck. 

Instead, qualifying workers may be able to deduct the overtime premium portion of their pay when filing their federal tax return for applicable years. Overtime wages are still subject to payroll taxes like Social Security and Medicare, and state tax rules may also apply. 

This policy was introduced to support hourly and non-exempt workers who regularly work extra hours, helping them keep more of their earnings while encouraging workforce participation and addressing labor shortages.

How does a “No Tax on Overtime” deduction technically work when applied?

Under the No Tax on Overtime provision, eligible workers can deduct the overtime premium portion of their pay—the amount earned above their regular hourly rate—when filing their federal income tax return. Overtime earnings must still be properly reported on official tax documents such as a W-2 or other employer-provided income statement.

Let’s look at a real-world scenario of a worker named Alex.

• Base Pay: $25/hour
• Overtime Rate: $37.50/hour
• Hours Worked: 50 hours (40 regular + 10 overtime)
• State Income Tax Rate: 5%

Scenario A: Standard Taxation

Income Type	Hours	Rate	Total Pay	Taxable Amount	Tax Due (5%)
Regular	40	$25.00	$1,000	$1,000	$50.00
Overtime	10	$37.50	$375	$375	$18.75
Total	50		$1,375	$1,375	$68.75

Scenario B: No Tax on Overtime (Exemption Applied)

Income Type	Hours	Rate	Total Pay	Taxable Amount	Tax Due (5%)
Regular	40	$25.00	$1,000	$1,000	$50.00
Overtime	10	$37.50	$375	$0	$0.00
Total	50		$1,375	$1,000	$50.00

Result: Alex saves $18.75 in taxes for that week alone, or nearly $1,000 over a year of similar work.

Who Qualifies for No Tax on Overtime?

Not every worker who puts in extra hours qualifies for the No Tax on Overtime benefit. Eligibility mainly depends on how your job is classified under U.S. labor laws and how your overtime pay is earned.

You may qualify if you are:

• Hourly workers who are paid overtime for working more than 40 hours in a workweek under the Fair Labor Standards Act (FLSA).
  
• Salaried, non-exempt employees whose roles still qualify for overtime pay despite being on a salary.
  
• Union workers who receive overtime pay that follows FLSA overtime rules and includes a true overtime premium.
  
• Middle-income earners who fall within the income limits set for the federal overtime tax deduction.
  

To qualify, the overtime must be legally defined overtime (not bonuses or flat extra pay), and only the premium portion of overtime pay may be eligible for the federal income tax deduction. Payroll taxes like Social Security and Medicare still apply, and eligibility is confirmed when filing your federal tax return, not on your paycheck.

Who Does NOT Qualify for No Tax on Overtime?

Not all workers are eligible for the No Tax on Overtime benefit. If your work or pay structure falls into any of the categories below, you generally do not qualify for the federal overtime tax deduction.

• Independent contractors (1099 workers): Freelancers and self-employed individuals do not earn overtime under federal labor law, so their extra hours are not eligible.
  
• Exempt employees: Many salaried professionals classified as exempt under the Fair Labor Standards Act (such as executives, administrative, and certain professional roles) are not entitled to overtime pay and therefore do not qualify.
  
• High-income earners: The overtime tax deduction phases out at higher income levels and may be fully unavailable for workers above the income limits.
  
• Workers paid bonuses or flat extra pay: Extra compensation that is not legally defined as overtime (such as bonuses, shift differentials, or lump-sum payments) does not qualify.
  
• Misclassified workers: Employees incorrectly classified as exempt or as contractors may lose eligibility unless their classification is corrected.
  

If you fall into one of these categories, your overtime or extra earnings are typically fully taxable under standard federal and state income tax rules.

Is Overtime Normally Taxed in the US?

Yes, under normal circumstances, all overtime pay is fully taxable in the United States. The IRS considers overtime to be supplemental wages, and it is subject to the same taxes as your regular pay. This includes:

Federal Income Tax: This is the primary tax people think about. The amount you pay depends on your income level and tax bracket. Overtime pay can sometimes push you into a higher tax bracket, leading to a higher tax rate on those extra dollars.

Social Security Tax: Both you and your employer pay Social Security tax. For 2025, the rate is 6.2% for employees on earnings up to the annual limit ($177,700).

Medicare Tax: You and your employer also both pay Medicare tax. The rate is 1.45% for employees on all earnings, with no income limit.

State and Local Income Taxes: Most states and some localities also have their own income taxes, which apply to overtime pay as well.

Example of Regular Overtime Taxation

Let’s look at a simple example without the new deduction.

• Worker: Maria, a warehouse associate.
• Regular Pay: $20 per hour.
• Work Week: She works 50 hours in one week.
• Regular Hours: 40 hours @ $20/hour = $800
• Overtime Hours: 10 hours
• Overtime Rate: Time-and-a-half is $20 x 1.5 = $30 per hour.
• Overtime Pay: 10 hours @ $30/hour = $300
• Total Gross Pay for the Week: $800 + $300 = $1,100

This entire $1,100 would be subject to federal income tax withholding, Social Security, and Medicare taxes, plus any applicable state taxes.

How the Overtime Deduction Is Calculated

This is the most critical part to understand: you cannot deduct your entire overtime pay. You can only deduct the “premium” portion of your overtime earnings from your federal income tax.

The Time-and-a-Half Concept

Let’s break down your overtime pay into two parts:

1. The Straight-Time Portion: This is what you would have been paid for your overtime hours at your regular hourly rate.
2. The Premium Portion: This is the extra “half-time” pay you receive for working overtime. This is the only part that is deductible.

Formula:

• Overtime Premium = (Overtime Rate – Regular Rate) x Overtime Hours

What Part is Deductible vs. NOT Deductible

• Deductible: The extra 0.5 (the “half”) of your time-and-a-half pay.
• NOT Deductible: The base “1.0” (the “time”) of your overtime pay.

Let’s use an example:

• Your Regular Rate: $22 per hour.
• Your Overtime Rate: $22 x 1.5 = $33 per hour.
• You work 5 overtime hours.
• Total Overtime Pay: 5 hours x $33 = $165.

Now, let’s find the deductible portion:

• Straight-Time Portion: 5 hours x $22/hour = $110 (Not Deductible)
• Premium Portion: 5 hours x ($33 – $22)/hour = 5 hours x $11/hour = $55 (Deductible)

In this case, you could deduct $55 from your taxable income for that week’s work.

Maximum Deduction Limits

To ensure the benefit is targeted toward lower- and middle-income workers, the law includes annual caps on the total deduction you can claim, as well as income phase-out limits.

Annual Deduction Caps

For the tax years 2025-2028, the maximum total overtime premium you can deduct per year is:

• $7,500 for Single, Married Filing Separately, and Head of Household filers.
• $15,000 for Married Filing Jointly and Qualifying Widow(er)s.

Income Phase-Out Limits

The deduction amount is also reduced if your Modified Adjusted Gross Income (MAGI) is too high.

• For Single / Married Filing Separately / Head of Household: The deduction begins to phase out at a MAGI of $90,000 and is completely eliminated at a MAGI of $110,000.
• For Married Filing Jointly / Qualifying Widow(er): The deduction begins to phase out at a MAGI of $180,000 and is completely eliminated at a MAGI of $220,000.

If your income falls within the phase-out range, your maximum deduction will be proportionally reduced. It’s best to use tax software to handle this complex calculation.

Real Examples

Let’s apply these rules to a few real-life scenarios for the 2025 tax year.

Example 1: Warehouse Worker (Single Filer)

• Name: David
• Filing Status: Single
• Regular Pay: $25 per hour
• Overtime Rate: $37.50 per hour
• Annual Overtime Hours: 200 hours
• Total Overtime Pay: 200 hours x $37.50 = $7,500
• Calculation for Deduction:
  • The “premium” portion is $12.50 per hour ($37.50 – $25).
  • Total Deductible Amount: 200 hours x $12.50 = $2,500.
• Result: David’s total income for the year is $61,000 (his MAGI). Since this is below the $90,000 phase-out threshold for single filers, he can deduct the full $2,500 from his taxable income, lowering his tax bill.

Example 2: Nurse (Married Filing Jointly)

• Name: Sarah
• Filing Status: Married Filing Jointly
• Regular Pay: $40 per hour
• Overtime Rate: $60 per hour
• Annual Overtime Hours: 300 hours
• Total Overtime Pay: 300 hours x $60 = $18,000
• Calculation for Deduction:
  • The “premium” portion is $20 per hour ($60 – $40).
  • Total Deductible Amount: 300 hours x $20 = $6,000.
• Result: Sarah and her spouse have a combined MAGI of $175,000. This is below the $180,000 phase-out threshold for joint filers. They can deduct the full $6,000 on their joint tax return.

Example 3: Construction Worker (Head of Household)

• Name: Mike
• Filing Status: Head of Household
• Regular Pay: $32 per hour
• Overtime Rate: $48 per hour
• Annual Overtime Hours: 500 hours
• Calculation for Deduction:
  • The “premium” portion is $16 per hour ($48 – $32).
  • Potential Deductible Amount: 500 hours x $16 = $8,000.
• Limit Check: The annual cap for a Head of Household filer is $7,500.
• Result: Even though Mike’s calculation is $8,000, he can only deduct the maximum allowed, which is $7,500. His MAGI is $85,000, so he is not affected by the income phase-out.

Do You Still Pay Social Security & Medicare?

Yes, absolutely. This is a critical point of confusion. The “no tax on overtime” rule applies only to federal income tax.

It has no effect on payroll taxes. Your entire gross earnings, including all regular and overtime pay, are still subject to:

• Social Security tax (6.2%)
• Medicare tax (1.45%)

These are separate tax systems from the federal income tax system. They are calculated on your gross wages before any deductions. The new law does not change this. Your employer will continue to withhold these taxes from every paycheck.

State Taxes: Does No Tax on Overtime Apply?

This new deduction is a federal law. It does not automatically apply at the state level. Each state has its own tax code, and they would need to pass their own legislation to conform to this federal change.

• States with Income Tax: For the majority of states that have an income tax, you should assume that your overtime pay is still fully taxable at the state level unless your state’s tax agency specifically announces it will honor the federal deduction. This is known as “state conformity.” Keep an eye on announcements from your state’s Department of Revenue.

• States without Income Tax: If you live in a state with no income tax (like Texas, Florida, or Washington), this part is not applicable to you, as you don’t pay state income tax on any of your wages.

Will My Paycheck Show No Tax on Overtime?

No, your paycheck will look the same as it always has. Your employer’s payroll system will continue to withhold federal income tax from your entire check based on the information you provided on your Form W-4.

The concept of withholding is based on an estimate of your annual tax liability. Payroll systems are not equipped to separate the premium portion of overtime and exclude it from withholding.

You will see the financial benefit of this deduction when you file your annual tax return. Claiming the deduction will reduce your total taxable income for the year, which can lead to:

• A larger tax refund.
• A smaller tax bill if you owe money to the IRS.

How to Claim No Tax on Overtime When Filing Taxes

Claiming this deduction requires careful record-keeping and attention to detail when you file your taxes.

Step-by-Step Guide

Identify Your Total Overtime Hours: Throughout the year, keep track of all overtime hours worked. Your pay stubs should clearly show this information.

Separate the Premium Portion: For each pay period, calculate the deductible “premium” portion of your overtime pay. Your pay stub may list your regular rate and total overtime pay, but you will likely need to do the math yourself to isolate the premium. (Premium = Overtime Hours x [Overtime Rate – Regular Rate]).

Sum for the Year: Add up all the deductible premium amounts from every paycheck during the tax year. Ensure this total does not exceed your filing status’s annual cap ($7,500 or $15,000).

Use Tax Software or a Professional: The easiest and safest way to claim the deduction is to use reputable tax software. These programs will be updated to include a specific line or section for the “Overtime Premium Deduction.” You will enter your calculated total, and the software will handle the rest, including applying any income-based phase-outs. The deduction will likely be reported on Schedule 1 of your Form 1040.

Keep Excellent Records: Keep all your pay stubs for the year as proof of your overtime earnings and calculations. If the IRS ever has questions about your return, you will need these documents to support your claim.

Common Myths & Misunderstandings Of No Tax on Overtime

Let’s debunk some of the most common myths about the no tax on overtime law.

Myth #1: “My overtime is completely tax-free.”

Fact: False. Only the “premium” portion (the extra half-time pay) is deductible from your federal income tax, and only up to certain limits. You still pay Social Security and Medicare taxes on all of it, and likely state income tax too.

Myth #2: “I won’t have any taxes taken out of my overtime paychecks.”

Fact: False. Your employer will continue to withhold all taxes from your entire paycheck as usual. The benefit comes when you file your tax return, not on your weekly or bi-weekly paycheck.

Myth #3: “Everyone who works overtime qualifies.”

Fact: False. The deduction is limited to specific types of employees (mostly non-exempt hourly and salaried workers) and is subject to income caps. High-earners, exempt salaried employees, and independent contractors do not qualify.

Pros & Cons of No Tax on Overtime

Pros

• More Take-Home Pay (Annually): The most obvious benefit is a lower federal income tax bill, which means more money in your pocket after filing your taxes.
• Increased Worker Motivation: The law may encourage employees to take on more overtime shifts, knowing a portion of it has a tax advantage.
• Economic Stimulus: Putting more money back into the pockets of working families can help stimulate the economy through increased spending.

Cons

• It’s a Temporary Law: The deduction is set to expire after the 2028 tax year, creating uncertainty for long-term financial planning.
• Added Complexity: Filing taxes becomes slightly more complicated. Workers must track their hours and perform calculations to claim the deduction correctly.
• Not Automatic: The benefit is not automatic. If a worker forgets or doesn’t know how to claim it on their tax return, they will miss out on the savings.

How Employers Handle Overtime Tax

The primary responsibility for claiming this deduction falls on the employee, not the employer. However, employers do have a role to play.

• Payroll Processing: Employers do not need to change their payroll withholding processes. They will continue to withhold taxes as they normally would.
• Employer Responsibilities: The key responsibility for employers is accurate reporting. Pay stubs must clearly show the employee’s regular rate of pay, overtime hours worked, and overtime wages paid. This information is what employees will need to calculate their deduction.
• Form W-2 Reporting: The employer’s Form W-2, which summarizes an employee’s annual wages and taxes, will not have a separate box for the overtime premium. The employee’s total wages will be reported in Box 1 as always.

Frequently Asked Questions (FAQs)

1. Is overtime tax-free in 2026?
No, it is not completely tax-free. A new federal law for 2025-2028 allows eligible workers to deduct the “premium” portion of their overtime pay from their federal income tax, which lowers their overall tax bill.

2. How much overtime is tax-free?
Only the extra “half” in your “time-and-a-half” pay is deductible. For example, if you earn $20/hour and your overtime rate is $30, the deductible portion is $10 for each overtime hour worked.

3. Does this no tax on overtime law apply every year?
No, this is a temporary law. It is only in effect for the tax years 2025, 2026, 2027, and 2028.

4. Can salaried employees qualify for the overtime tax deduction?
Only if they are “non-exempt” salaried employees who are legally entitled to and receive overtime pay for working more than 40 hours a week. Most “exempt” salaried professionals do not qualify.

5. How will I get the money back?
You claim the deduction when you file your annual federal income tax return. This will reduce your total tax owed for the year, resulting in either a bigger tax refund or a smaller amount due to the IRS.

6. Is there an income limit to qualify?
Yes. For 2025, the deduction starts to phase out for single filers with a Modified Adjusted Gross Income (MAGI) above $90,000 and for joint filers with a MAGI above $180,000.

7. Do I need a special form to claim the overtime tax deduction?
The deduction will be claimed on your standard Form 1040, likely via Schedule 1. Tax software will be updated to guide you through this process.

8. What’s the difference between the overtime tax deduction and the overtime tax exemption?
A deduction reduces your taxable income, while an exemption would mean the income isn’t taxed at all. This new law is a deduction, not an exemption.

9. Will this affect my Social Security and Medicare taxes?
No. You will still pay Social Security and Medicare taxes on your entire overtime earnings. The new rule only applies to federal income tax.

10. What records should I keep?
You must keep all of your pay stubs for the tax year. They are the official record of your regular rate of pay, overtime hours, and overtime wages, which you will need to prove your deduction if asked.

Final Summary

The new “no tax on overtime” law is a valuable but often misunderstood opportunity for many American workers. It’s not a complete tax exemption, but rather a targeted federal income tax deduction on the premium portion of your overtime pay for the years 2025 through 2028.

Who Benefits Most?

Non-exempt hourly and salaried workers with low-to-moderate incomes who work significant overtime will see the greatest benefit. It rewards those in demanding fields like manufacturing, healthcare, logistics, and construction for their extra hours.

What to Remember

• It’s a Deduction, Not an Exemption: You only deduct the “premium” portion.
• The Benefit is on Your Tax Return: Your paychecks won’t change.
• Keep Good Records: Your pay stubs are your proof.
• It’s Temporary: The law is set to expire after 2028.

To make the most of this new rule, stay informed about the specifics, diligently track your overtime hours and pay, and use a trusted tax software or consult a tax professional when you file. This will ensure you accurately claim the deduction you’ve earned.