1. What is the “No Tax on Overtime” provision in the OBBBA?
The “No Tax on Overtime” provision is part of the One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025. It allows eligible workers to deduct up to $12,500 (or $25,000 for joint filers) of qualified overtime pay from their federal taxable income for tax years 2025 through 2028. This applies only to federal income tax, not Social Security, Medicare, or state/local taxes.
2. Who is eligible for the overtime tax deduction?
Eligible workers include nonexempt employees under the Fair Labor Standards Act (FLSA) who earn overtime pay (at least 1.5 times their regular rate) for hours worked over 40 in a workweek. The deduction is available to those with a valid Social Security number and whose modified adjusted gross income (MAGI) is below $150,000 for single filers or $300,000 for joint filers. The deduction phases out by $100 for every $1,000 above these income thresholds.
3. Does the deduction apply to all overtime pay?
No, the deduction only applies to the premium portion of overtime pay (the “extra half” above the regular rate) required by the FLSA. For example, if an employee earns $20/hour normally and $30/hour for overtime, only the additional $10/hour qualifies for the deduction. Overtime paid under state laws or contractual agreements does not qualify unless it meets FLSA standards.
4. Are exempt employees eligible for this deduction?
No, exempt employees (e.g., salaried professionals under the FLSA) are not eligible, as they do not receive overtime pay at a higher rate for hours worked beyond 40 in a workweek.
5. How does the deduction work when filing taxes?
The deduction is an above-the-line deduction, meaning you can claim it without itemizing deductions on your tax return. Eligible workers can deduct up to $12,500 (or $25,000 for joint filers) of qualified overtime pay when filing their federal income tax return (Form 1040). You must include your Social Security number (and your spouse’s, if filing jointly) on the return.
6. Are overtime wages still subject to other taxes?
Yes, overtime wages remain subject to Social Security, Medicare, and applicable state or local taxes. Employers must continue to withhold these taxes as usual. The OBBBA deduction only applies to federal income tax.
7. How will employers report overtime pay for this deduction?
Employers must report qualified overtime compensation on a separately furnished statement or Form W-2 for employees. For 2025, a transition rule allows employers to approximate this amount using a reasonable method specified by the IRS. Starting in 2026, withholding procedures may be modified to account for the deduction.
8. Will this change how overtime is taxed during the year?
No, employers will continue to withhold federal income tax, Social Security, and Medicare taxes from overtime pay as usual. The deduction is applied when employees file their federal tax returns, potentially reducing their tax liability or increasing their refund.
9. Is the deduction permanent?
No, the deduction is temporary and applies only to tax years 2025 through 2028. It is set to expire after 2028 unless extended by future legislation.
10. How does this affect payroll systems?
Employers may need to update payroll systems to track and report qualified overtime pay separately on Forms W-2. The IRS is expected to provide guidance on reporting requirements, particularly for the 2025 transition period. Employers should work with payroll providers or tax professionals to ensure compliance.
11. Will states adopt similar no-tax-on-overtime rules?
The OBBBA only affects federal income tax. Some states are considering similar exemptions, but state tax laws vary, and employers must comply with state-specific regulations. Check with your state’s tax authority for updates.
12. Where can I find more information?
For detailed guidance, consult a tax professional or visit the IRS website for upcoming guidance on OBBBA provisions. The White House also provides an overview of the OBBBA.
Disclaimer: This communication is for informational purposes only and does not constitute tax or legal advice. Please consult a qualified tax professional to understand how this provision applies to your specific situation.
