No Tax on Overtime

Published July 25, 2025

In the recent Presidential election, both candidates supported the concept of removing taxes on overtime. The One Big Beautiful Bill Act signed on July 4, 2025, created an overtime exclusion of up to $12,500 for years 2025 to 2028. The overtime pay must be in excess of the normal full-time pay rate. If an employee earns $18 per hour and is paid $27 per hour for overtime, only the $9 added pay is deductible.

There is a limited exclusion of up to $12,500 ($25,000 for joint filers) for overtime income. The overtime exclusion applies to taxpayers with a modified adjusted gross income of $150,000 ($300,000 for a joint return). There is a 10% phaseout above those levels. The overtime benefit phases out for single taxpayers with income of $275,000 and for joint taxpayers with income over $425,000.

The overtime exclusion will be subject to Treasury Secretary regulations to define the methods for determining regular and overtime compensation. Generally, the definitions will follow Section 7 of the Fair Labor Standards Act of 1938. This law generally limits overtime to the amount of time over 40 hours per week. All overtime pay will still be subject to Social Security and Medicare taxes.

The overtime deduction will also be allowed in addition to the standard deduction. It is not necessary to itemize to qualify for the overtime deduction. There will be a reporting requirement for employers to designate the amount of overtime. This information will also be reported to the IRS.

Editor’s Note: Because most employees qualify for the overtime deduction, there may be attempts to structure compensation plans to maximize overtime. The Treasury Secretary is likely to be quite specific in listing the qualified overtime rules to limit potential improper use of this deduction.