Aug 27, 2025

Understanding the New Tax Break for Overtime Pay

Thanks to a new federal income tax deduction provided by the One Big Beautiful Bill Act, many workers who put in extra hours will be able to keep more of their earnings. Read through to see who qualifies, how much could be saved and what the limits are.

By law, nonexempt employees — whether paid hourly or salaried — must be paid at least 1.5 times their regular rate of pay for all hours worked over 40 in a workweek. The One Big Beautiful Bill Act introduces a tax break for certain workers who earn overtime, using an above-the-line deduction.

An above-the-line deduction reduces your taxable income before adjusted gross income is calculated, and you can claim it even if you take the standard deduction instead of itemizing.

Who qualifies

To qualify, employees must:

• Be classified as nonexempt under the Fair Labor Standards Act.
• Work more than 40 hours per workweek at a rate of at least 1.5 times their regular pay.
• Have a Social Security number and be legally authorized to work in the U.S.
• File jointly if married.

Hourly employees in fields such as nursing, law enforcement and emergency response are expected to be among the main beneficiaries.

How the deduction works

Qualified overtime compensation is the amount paid above an employee's regular rate of pay. The maximum annual deduction is $12,500 ($25,000 for joint filers). It phases out by $100 for every $1,000 of modified adjusted gross income above $150,000 ($300,000 for joint filers). This provision applies to tax years 2025 through 2028.

Any qualified overtime must be reported to employees on Form W-2, Form 1099 or other acceptable tax statement. Employers must report the same total to the IRS. For 2025, the IRS will offer transition relief for both taxpayers and employers subject to the new reporting requirements.

Overtime wages will still be subject to withholding, but employees can deduct the federal income taxes paid on those wages when filing their returns. Payroll taxes for Social Security and Medicare will still apply.

Only FLSA-required overtime is deductible; state-only or contractual overtime is not.

Potential impacts

The White House estimates the average overtime worker could save between $1,400 and $1,750 annually. However, the tax deduction is unlikely to benefit individuals at lower earned income levels.

Some analysts warn that removing income tax on overtime could shift labor patterns by encouraging more employees to work extra hours, potentially making those roles more appealing than exempt positions.

As this is a new law, there may be confusion regarding eligibility and reporting. Employees should consult a qualified tax professional to be sure they meet all requirements.