No Tax On Overtime | When It Starts, Limitations, and More

December, 09 2025 by Karen Thomas-Brandt, EA

If you're an hourly worker who often puts in overtime, you might have felt a boost of excitement when you heard about the new legislation eliminating taxes on overtime. Like me, you might have wondered, “When does it take effect? Do I qualify? How does it work?” This blog will answer these questions and more!
 

Before Legislation Passed

Before the passing of One Big Beautiful Bill (OBBB), all overtime was taxed at the same rates and rules as your regular hourly wages. All of your earnings, including overtime, were combined to determine your overall tax bracket.
 

What the Rule Is Now

Starting January 1, 2025, individuals who earn qualified overtime pay can claim an income tax deduction on their tax return. Here are answers to some important questions you might have:

• What is “qualified overtime”? The deduction only affects the premium part of your overtime pay—the extra "half" you earn for hours over 40 in a workweek, as required by the Fair Labor Standards Act (FLSA).
   
  • Example 1: If you earn $30/hour and get paid $45/hour for overtime, the $15 premium portion is what qualifies for the deduction. 
     
• How much can I deduct? The deduction is up to $12,500 annually ($25,000 for joint filers).
   
• Are there income limits? If your modified adjusted gross income (MAGI) is more than $150,000 a year (or $300,000 if you’re married filing jointly), you start to lose part of the deduction. For every $1,000 you make past that point, the deduction goes down by $100. Once your income hits $275,000 ($550,000 for joint filers), the deduction disappears completely.
   
  • Example 2: If you are a single taxpayer who has $200,000 of MAGI, your overtime deduction will be reduced by $5,000. The calculation is as follows: 
     
  • $200,000 (MAGI) - $150,000 (phaseout threshold) = $50,000 
     
  • The deduction is reduced $100 for every $1,000 of income over the threshold: 
     
  • $50,000 / $1,000 = 50 
     
  • 50 x $100 = $5,000 reduction 
     
  • Therefore, your potential deduction would be $7,500 ($12,500 maximum, less the $5,000 reduction).
     
• What is modified adjusted gross income (MAGI)? For this deduction, MAGI is your adjusted gross income (AGI) plus any amounts excluded from your gross income for the following: foreign earned income and foreign housing expenses, income from U.S. possessions, and income from Puerto Rico.
   
• Do I need to itemize to claim the deduction? The deduction is available whether or not you itemize your deductions.
   
• Do all filing statuses qualify for the deduction? If you are married, you must file jointly; married filing separately does not qualify. All other statuses qualify.
   
• How can I determine how much to claim on my tax return? Your employer is required to track and report your qualified overtime premium pay on your annual wage statement, such as a Form W-2. For 2025, this amount will probably appear in Box 14.
   
• Where do I put this information on my tax return? A new form, Schedule 1-A, should be used to report your deduction. At the time of this blog's publication, the final version of the form was not yet available. A draft of the form can be found here: 2025 Schedule 1-A (Form 1040) draft. Please note that this deduction is not allowed unless the taxpayer’s Social Security number appears on the tax return.
   
• Is qualified overtime pay also exempt from FICA and FUTA taxes? This deduction does not apply to Social Security (FICA) or unemployment (FUTA) taxes — all overtime pay is still subject to those payroll taxes.
   
• How long can I take advantage of this new deduction? The rule is effective for tax years starting after December 31, 2024, and it expires after 2028. 

The OBBB Act is quite comprehensive and can be confusing, especially with new legislation, such as the no-tax-on-overtime provision. For more information on this topic, visit this IRS website.