What Is No Tax On Overtime and When Does It Start 2026?
In recent U.S. tax reform, a new provision commonly referred to as “No Tax on Overtime” has emerged that changes how overtime pay is treated for federal income tax purposes. This provision is designed to provide relief to workers who earn additional income by working extra hours. Although overtime was historically treated the same as regular wages for tax purposes, the new law enables eligible workers to reduce their taxable income by deducting a portion of their overtime pay.
This article explains what No Tax on Overtime means, when it starts, how it works, who qualifies, and the potential benefits and limitations.
What Is No Tax on Overtime?
The No Tax on Overtime provision allows eligible workers to deduct a specified amount of overtime compensation from their federal taxable income when they file their income tax returns. Rather than being an outright tax exemption on every dollar earne from overtime, the law creates a deduction that reduces taxable income, effectively lowering tax owed.
The deduction applies only to a specific category of overtime compensation defined by federal labor law.
What is No Tax on Overtime Bill?
The No Tax on Overtime Bill is a federal tax law provision that allows eligible workers to deduct a portion of their overtime pay from federal taxable income. Instead of fully taxing overtime wages like regular pay, the bill provides an above-the-line deduction for qualified overtime compensation, reducing the amount of income subject to federal income tax.
Key points:
- It applies to qualified overtime pay under federal labor law.
- The deduction is available starting with the 2025 tax year.
- It does not eliminate payroll taxes (Social Security and Medicare still apply).
- The benefit is subject to income limits and caps on how much overtime can be deducted.
- The deduction is claim when filing a federal tax return, not automatically through payroll.
In simple terms, the bill is design to lower federal income tax liability for workers who earn income by working overtime.
When Does No Tax on Overtime Start?
The No Tax on Overtime provision starts with the 2025 tax year. Overtime pay earned from January 1, 2025 onward is eligible, and the benefit is claim when filing 2025 federal tax returns in 2026.
- Overtime pay earned beginning January 1, 2025 qualifies for the deduction when taxpayers file 2025 federal income tax returns in 2026.
- It is schedule to remain in place through December 31, 2028, unless Congress extends or modifies the law.
Also Read: $3000 IRS Tax Refund Schedule 2025
Who Qualifies for the Deduction?
To claim the No Tax on Overtime deduction, taxpayers must meet specific criteria:
1. Employee Status
- Must be a non-exempt employee under the Fair Labor Standards Act (FLSA), meaning eligible for overtime pay.
2. Qualified Overtime Compensation
- Only the premium portion of overtime typically the “extra half” above regular pay under time-and-a-half qualifies. Regular hourly wages do not.
3. Reporting
- Qualified overtime must be properly reported on a Form W-2, Form 1099, or equivalent statement. Employers are responsible for tracking and reporting qualified overtime compensation.
4. Income Limits
- There are phase-out thresholds based on Modified Adjusted Gross Income (MAGI):
- Single filers: starts phasing out above $150,000.
- Joint filers: starts phasing out above $300,000.
- Above higher MAGI thresholds, the deduction may not be available.
5. Filing Status
- Married couples must file jointly to claim the deduction. Separate returns generally disqualify each spouse from claiming it individually.
Also Read: 500 dollar irs tax refund 2025
How Much Can Be Deducted?
The maximum deduction under current law is up to $12,500 per individual taxpayer and up to $25,000 for married couples filing jointly.
The deduction is above the line, meaning it can be claim even if the taxpayer does not itemize deductions.
The amount deducted cannot exceed the qualified overtime pay received and is subject to income-based phase-outs.
Important Clarifications: What This Does and Does Not Mean
- This deduction applies to federal income tax only. Overtime pay is still subject to:
- Social Security tax
- Medicare tax
- State or local taxes, if applicable in your state.
- Workers generally will still see withholding for federal income tax from their paychecks during the year; the deduction is realiz when filing a return.
- The term “no tax” refers to the deduction, not an automatic exemption at the point of withholding. Employers may not adjust withholding for this new provision until IRS forms and instructions fully reflect it.
How to Claim the Deduction
To claim No Tax on Overtime when filing your 2025 federal income tax return (due in 2026):
- Report Qualified Overtime Compensation (QOC) on your tax return.
- Include the qualified amount on the appropriate schedule/form as directed by IRS guidance (currently reflected in IRS publication and draft instructions).
- Meet income limit requirements and other eligibility conditions.
- Consult with a tax professional or use updated tax preparation software to ensure accurate filing and full use of the deduction.
Frequently Asked Questions
How does the no tax on overtime work?
“No Tax on Overtime” creates a federal income tax deduction for qualified overtime pay. Eligible employees can reduce their taxable income by up to $12,500 (or $25,000 for joint filers) for overtime compensation received in a tax year, subject to income limits.
How does the no tax on overtime work in 2025?
For the 2025 tax year, the deduction applies to qualified overtime pay earned in 2025. Workers still pay federal income tax during the year through withholdings, but the deduction can reduce their taxable income when they file returns in 2026.
Is no tax on overtime good or bad?
Whether it is “good” or “bad” depends on individual circumstances. Some workers will benefit significantly by reducing taxable income, while others with higher incomes or limited overtime earnings may see limited benefit. Tax policy analysts note it applies to a relatively small percentage of filers.
Why is overtime taxed at 40%?
Overtime itself isn’t tax at a special rate like 40%. Instead, overtime pay has traditionally been tax at the worker’s ordinary federal income tax rate, which can be higher depending on total income. The perception of a 40% tax comes from combining federal, payroll, and possibly state taxes at higher marginal rates.
How to calculate no tax on overtime pay?
To calculate the deduction:
- Identify how much qualified overtime compensation you earned.
- Determine the portion eligible for deduction (up to $12,500 or $25,000).
- Ensure your MAGI is within eligibility limits.
- Subtract this amount from your taxable income on your federal tax return.
Consult tax preparation software or a CPA to ensure proper calculation and compliance with IRS rules.
Is the no tax on overtime bill passed?
Yes. The No Tax on Overtime provision has been pass at the federal level and applies starting with the 2025 tax year, allowing eligible workers to deduct qualified overtime pay from federal taxable income.
Has overtime pay always been taxed?
Yes. Historically, overtime pay has always been tax the same as regular wages for federal income tax, as well as Social Security and Medicare taxes. There was no special tax relief for overtime before this new law.
What states do not tax overtime pay?
States that do not have a state income tax do not tax overtime pay (or regular wages). These include:
- Alaska
- Florida
- Nevada
- South Dakota
- Texas
- Washington
- Wyoming
Additionally Tennessee and New Hampshire do not tax wage income (they only tax interest/dividends), so overtime pay is also not taxed at the state level there. In all other states with an income tax, overtime pay is generally taxed the same as regular wages.
Conclusion
The No Tax on Overtime provision represents a meaningful tax change for eligible workers starting with the 2025 tax year. By allowing certain overtime payments to be deducted from federal taxable income, it provides targeted tax relief, especially for hourly workers who rely on overtime for a substantial portion of their earnings.
As with any tax change, the real benefit realized by an individual taxpayer will depend on their unique income, withholding, and filing situation. Working with tax professionals and updated software is recommended to maximize the value of this new deduction. contact Winscloud Matrix for drake tax hosting.
