How does the "no tax on overtime" work?​

As part of the One Big Beautiful Bill Act (OBBBA) signed into law on July 4, 2025, “qualified overtime” now receives an above-the-line deduction on your federal tax return. So while overtime isn’t entirely tax-free, a deduction with certain limits is provided for tax years 2025-2028.
 
What counts as “qualified overtime”

• Pay received for hours worked in excess of 40 hours per week
• Overtime that is required by law (i.e. - time-and-a-half under federal or state labor rules)
• Overtime compensation that is separately identifiable from regular wages
• Only the overtime premium portion qualifies - not the employee’s base hourly wage.

 
For example:
If an employee earns $30/hour and $45/hour for overtime, only the extra $15/hour premium is treated as qualified overtime compensation.
 
What does not qualify

• Regular (non-overtime) wages
• Bonuses, commissions, or shift differentials
• Salary pay for exempt employees
• Voluntary “extra pay” not legally classified as overtime
• Independent contractor compensation
• The rule applies to employees, not self-employed individuals.

 
Dollar limits and income phase-outs

• Deduction cap is $12,500 per year (single filers) and $25,000 per year (married filing joint)
• The deduction phases out at higher income levels
• Phase-out begins at:
  • $150,000 modified adjusted gross income for single filers
  • $300,000 for joint filers
• High-income taxpayers may receive a reduced or zero benefit

 
What taxes still apply (even if the overtime deduction is claimed)

• Social Security
• Medicare
• Additional Medicare tax (if applicable)
• State income tax, unless state law changes

 
The deduction is claimed on the employee’s tax return, not through payroll.