Frequently Asked Questions
Get comprehensive answers about the No Tax on Overtime deduction under the One Big Beautiful Bill Act. Complete FAQ covering eligibility, calculations, employer requirements, and more.
Legal & Legislation
Is the overtime tax deduction a real law?
Yes, the overtime tax deduction is part of the "One Big Beautiful Bill Act" (H.R.1, Section 70202), signed into law on July 4, 2025. It allows eligible employees to deduct the premium portion of their overtime pay from federal income tax for tax years 2025 through 2028.
Does this mean all taxes on overtime pay are eliminated?
No, the deduction applies only to federal income tax. Employees will still pay FICA taxes (Social Security and Medicare) and any applicable state or local income taxes on their overtime earnings. This is a common misconception.
How long will the overtime tax deduction be available?
The deduction is temporary, effective for tax years 2025 through 2028. It will expire after the 2028 tax year unless Congress extends it.
Are there state or local tax implications for overtime pay?
Yes, the federal deduction does not affect state or local income taxes. Employees may still owe state and local taxes on overtime earnings, depending on their jurisdiction. For example, Alabama had a temporary overtime tax exemption that expired in June 2025.
Eligibility Requirements
Who is most likely to benefit from this deduction?
Middle-income hourly workers who frequently work overtime mandated by the federal Fair Labor Standards Act (FLSA) are the primary beneficiaries. High-income earners or those with minimal overtime may see reduced benefits due to income phase-out rules.
What are the income limits and phase-out rules for the deduction?
The deduction begins to phase out at a modified adjusted gross income of $150,000 for individuals or $300,000 for married couples filing jointly. For every $1,000 above these thresholds, the deduction is reduced by $100. Employees become ineligible if their income exceeds $160,000 (individuals) or $320,000 (joint filers).
Who qualifies for the overtime tax deduction?
Employees who receive overtime pay mandated by Section 7 of the FLSA qualify. This excludes overtime paid solely under state laws (e.g., California's daily overtime rules) or contractual agreements unless they also meet FLSA requirements. Eligible employees must meet income limits and include their Social Security number on their tax return.
Can self-employed individuals claim this deduction?
No, the deduction is specific to employees who receive overtime pay under FLSA regulations. Self-employed individuals are not subject to FLSA overtime rules and therefore do not qualify.
Does this apply to overtime worked on holidays or weekends?
The deduction applies to any overtime pay that meets FLSA requirements, regardless of when it's worked. However, premium pay for holidays, weekends, or shift differentials that aren't required by FLSA generally don't qualify unless they're part of FLSA-mandated overtime.
Calculations & Limits
What is the "overtime premium" and how is it calculated?
Overtime pay is typically 1.5 times an employee's regular hourly rate. For example, if your regular rate is $20 per hour, your overtime rate is $30 per hour, with a $10 "premium" (the additional 50%). Only this premium portion is eligible for the tax deduction, not the full overtime amount.
What is the maximum amount I can deduct each year?
The maximum deduction is $12,500 for individuals and $25,000 for married couples filing jointly. This applies only to the premium portion of overtime pay (e.g., the extra 50% above the regular rate).
Will this affect my other tax credits or deductions?
Since this is an above-the-line deduction that reduces your Adjusted Gross Income (AGI), it may help you qualify for other income-based tax credits and deductions that have AGI thresholds. However, the impact varies based on your specific tax situation.
What if I work for multiple employers and earn overtime?
If you work for multiple employers and earn overtime that qualifies under FLSA, each employer should report their portion of qualified overtime compensation on separate W-2 forms. You can claim the deduction for the total qualified overtime premium, subject to the annual caps.
General Information
Is the No Tax on Overtime Calculator an official IRS tool?
No, the calculator is an independent tool designed for estimation purposes. It is not created or endorsed by the IRS or any government agency and is intended for educational use to provide approximate tax savings estimates.
Do I need to do anything special when filing taxes to claim this deduction?
Your employer is required to report your qualified overtime compensation as a separate line item on your Form W-2. When filing your federal income tax return, you can claim the deduction for this amount, following IRS guidelines. Always consult a tax professional for accurate filing.
Are there any potential downsides to this provision?
The policy may raise fairness concerns, as workers with similar annual incomes could face different tax burdens depending on whether their income includes overtime pay. Additionally, it might incentivize employees to work more overtime, potentially impacting work-life balance and employee well-being.
What happens if I'm audited by the IRS regarding this deduction?
If audited, you'll need to provide documentation showing your qualified overtime compensation as reported on your W-2. Keep all pay stubs, W-2 forms, and employment records that demonstrate your overtime hours and rates. The IRS will verify that the overtime meets FLSA requirements.
Employer Requirements
How does this provision affect employers?
Employers must report qualified overtime compensation on employees' W-2 forms as a separate line item. They should also avoid restructuring compensation (e.g., converting salaried employees to hourly with low base rates to maximize overtime) due to potential legal risks under FLSA regulations.
Calculator Usage:
To use a No Tax on Overtime Calculator, input your regular hourly rate, overtime hours worked, and income details. The tool estimates your tax savings based on the deductible premium portion of your overtime pay. Always verify results with a tax professional.
Policy Context:
The "No Tax on Overtime" provision aims to provide financial relief to working-class Americans, but its impact varies. While some workers may see modest increases in after-tax income, low-income earners might benefit less due to existing tax credits or lower tax liabilities.
Employer Compliance:
The IRS may introduce new reporting requirements for employers to distinguish overtime pay on W-2 forms, increasing administrative burdens. Employers should stay updated on Treasury regulations to ensure compliance.
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Use our calculator to estimate your potential tax savings under the new overtime deduction.
Important Disclaimer
This FAQ provides comprehensive information about the "No Tax on Overtime Calculator" and the associated tax policy, addressing eligibility, limitations, and practical considerations for employees and employers. This information is for educational purposes only and should not be considered professional tax advice. Consult with a qualified tax professional for personalized guidance.