Changes to Overtime Taxes Under the New 2025 Rules

With the introduction of the “no tax on overtime” rule in the OBBBA, many employees see a potential reason to celebrate as they head into the 2025 tax year. This may result in meaningful tax savings, but only if you are eligible. Let’s take a closer look at how the rule really works and clear up a few common misconceptions. 

What is “No Tax on Overtime” Rule 

No Tax on Overtime is a new tax break under OBBBA that helps eligible workers keep more of what they earn when they work extra hours. For the 2025–2028 tax years, qualifying individuals can deduct up to $12,500 in overtime pay ($25,000 for joint filers) from their taxable income. This means the overtime portion of your pay (the amount above your regular rate) can lower the taxes you owe or even boost your refund, even though that income is still reported on your tax forms. It’s a helpful way to soften the tax hit that can come with earning overtime. 

Who qualifies for the overtime deduction? 

If you regularly work overtime, this new tax break may apply to you. Here’s who typically qualifies: 

• Non-exempt workers 

You must be eligible for overtime under federal labor laws. This usually includes hourly workers and some salaried employees who earn below the federal threshold and receive overtime pay. It must be reported on a W-2 or other required tax statement. 

• Workers within the income limits 

The deduction is fully available if your income is $150,000 or less (or $300,000 or less if you’re married and filing jointly).  

• Those earning qualified overtime pay 

Only the extra pay earned for working more than 40 hours in a week qualifies for the deduction. You must receive at least time-and-a-half pay (1.5 times your regular hourly rate) for those overtime hours. Holiday pay, bonuses, and double time generally do not qualify unless they are required under federal overtime rules. 

These rules follow federal overtime guidelines under the Fair Labor Standards Act (FLSA). Employees classified as exempt under the FLSA, such as many salaried professionals, do not earn overtime pay and are not eligible for this deduction. 

Common Misconceptions Explained 

You’re not alone if this tax break feels a little confusing at first. Below are some common misconceptions and what the rule really means. 

• Misconception #1 — “It makes all my overtime pay tax-free.”  You’re not removing federal tax on all overtime pay. The deduction only applies to the portion of overtime pay that exceeds your regular hourly rate, which is the premium half of a time-and-a-half overtime wage under the Fair Labor Standards Act. The base hourly portion of overtime pay remains fully taxable. 

• Misconception #2 — “There’s no limit — take it all!”  There is a cap on how much overtime premium can be deducted each year. The maximum deduction is $12,500 for single filers and $25,000 for married couples filing jointly. Because this is a deduction rather than a credit, it reduces taxable income but does not reduce taxes dollar for dollar. 

•  Misconception #3 — “It applies to everyone who works overtime.”  Only overtime required under federal Fair Labor Standards Act rules qualifies for the deduction. Overtime required solely by state law, contractual overtime, or premium pay beyond federal requirements does not qualify. Employees who are exempt from federal overtime rules will not have qualified overtime compensation for this deduction. 

• Misconception #4 — “There’s no income eligibility or phase-out.”  The deduction begins to phase out based on modified adjusted gross income. For single filers, the phase-out starts at $150,000, and for married couples filing jointly, it begins at $300,000. At higher income levels, eligibility can be reduced or eliminated entirely. 

• Misconception #5 — “My employer will show it separately on the W-2 automatically.”  For tax year 2025, employers are not required to separately report qualified overtime compensation on Form W-2 or 1099. Employees may need to rely on pay stubs, payroll summaries, or employer statements to calculate the deductible portion. The IRS allows the use of a reasonable method to determine the overtime premium for this year. 

• Misconception #6 — “It affects payroll taxes too.”  The overtime deduction does not reduce payroll taxes. Social Security, Medicare, and unemployment taxes still apply to all wages, including overtime pay. The deduction affects only federal income tax. 

• Misconception #7 — “It’s a permanent change.”  This provision is temporary and currently applies only to tax years 2025 through 2028. Congress may extend, modify, or allow the deduction to expire. Taxpayers planning long-term should consider the limited timeframe when projecting future tax benefits. 

Guidance on Minimizing the Tax Impact of Overtime Earnings 

The new 2025 overtime tax provision creates opportunities for eligible taxpayers to keep more of what they earn. Reviewing your tax strategy ahead of filing season can help ensure you don’t miss out on valuable savings. At Oddo Financial, our tax filing services guide you through the process, ensuring amounts are calculated accurately and supported by proper payroll documentation. Reach out to our team today to learn how this new provision could benefit you.