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On 4th July, 2025, the No Tax on Overtime provision was signed into an act as a part of the broader One Big Beautiful Bill (OBBBA).

Under this act, the eligible taxpayers can claim a deduction of up to $25,000 annually, as stated by the Internal Revenue Service.

For Tax Year 2025, existing forms and withholding tables remain unchanged. Employers should report overtime as usual, without segregation on W-2s or 1099s.

Overtime pay has long been viewed as a path to extra income. However, as every extra hour worked usually results in additional income tax, the financial incentive is muted.

Enter the “No Tax on Overtime” provision, part of the broader One Big Beautiful Bill (OBBBA), enacted into law on July 4, 2025.

This measure promises to deliver much-needed tax relief to many American workers by allowing them to exclude a portion of their overtime compensation from federal taxable income.

But what’s the actual status of this law? How does it work—and what should taxpayers and employers know?

In this article, I will explain:

The No Tax on Overtime Bill.

The eligibility for tax deductions on overtime pay.

How to report for tax deductions.

The benefits and limitations of this Act.

Things that employers and employees should keep in mind.

Therefore, if these are some of the things that you want to know, keep on reading till the end…

What Was The Previous Taxation On Overtime Pay?

Before I talk about the new “No tax on overtime” provision under the OBBBA, let me give you a brief overview of what it was like previously.

As per the U.S. federal law, every hour an employee works beyond 40 hours in a workweek must be compensated at one and a half times the employee’s standard hourly rate.

Besides, nonexempt workers are those who can claim overtime pay under the FLSA (Fair Labor Standards Act).

that only 12% of the workers were reported to be regularly employed under FLSA-qualified overtime conditions, and a further 5% were working FLSA overtime occasionally.

Was overtime charged differently from the regular wages? The answer is no.

Moreover, overtime is taxed just like regular wages and is subject to the same set of taxes, which include federal income, Social Security, and Medicare taxes.

Overtime pay was initially subject to the same tax withholding and calculation procedures as regular pay.

The employer was required to send all taxes that had been withheld from the employees to the tax authorities and submit the tax and the employee’s income information on Form 941 and the employee’s W-2 form.

However, after the implementation of the newly passed law on overtime taxation, the overtime wages of employees have been freed from federal income taxes.

What Is The “No Tax On Overtime” Provision?

On 13th March, 2025, the government introduced the No Tax On Overtime Act of 2025 in the Senate. As stated on Congress.gov:

“This bill excludes from gross income for federal income tax purposes overtime compensation paid for hours worked in excess of 40 hours per week (as required by the Fair Labor Standards Act of 1938). Under current law, overtime compensation paid to a taxpayer is included in gross income for purposes of calculating federal income taxes.”

The law establishes a new above-the-line deduction—not a full exemption—for “qualified overtime compensation.” According to the Internal Revenue Service, this exceeds the regular rate, typically the “half” portion of “time-and-a-half” pay mandated under the Fair Labor Standards Act (FLSA).

As per the new law on overtime pay, the eligible taxpayers can claim deductions of up to:

Up to $12,500 annually (single filers).

Up to $25,000 for married couples filing jointly.

However, it is important for you to understand what this law really means. Unlike what most people would assume, this newly passed Act does not make your overtime income free from tax. It only makes certain deductions possible.

Shannon Pierce, who is an employment lawyer at the Fennemore law office in Reno, Nevada, explained to the Reno Gazette Journal why it is important to be “very careful exactly what we’re talking about” when we discuss the No Tax on Overtime Act.

She explained that if someone who normally gets paid $20 per hour and gets $10 more for their overtime, the person would not have to pay tax for that extra $10 premium pay. “The IRS would still like its cut of the regular portion of your wage,” she stated.

Effective Dates And Duration Of This Act

This deduction is retroactive to January 1, 2025, and runs through December 31, 2028. In other words, it is basically a four-year window for eligible taxpayers to benefit.

“The current end date for the provision is December 31, 2028, but Congress may choose to extend it in the future,” stated H&R Block.

On August 7, 2025, the IRS announced that for the 2025 tax year, there will be no changes to the following:

Form W-2.

Forms 1099 and 941.

Additionally, there will be no changes in the federal income tax withholding tables during the implementation or rollout of the One Big Beautiful Bill Act. The authoritative body announced that we can anticipate new instructions and forms for 2026.

However, Patriot Software mentions that although payroll reporting will remain the same in 2025, the correct overtime record will be necessary for employees who want to take the federal overtime tax deduction on their 2025 returns.

In fact, overtime will not be separately identified on the W-2 this year; however, the employees can still deduct the FLSA overtime premium if they qualify under the IRS rules.

Read Also: The Importance Of Legal Compliance Around Overtime and Timekeeping

Qualifications And Restrictions On “No Tax On Overtime” Provision

Understanding whether you qualify for this provision is extremely important oif you want to get your tax deductions. Here are a few things that you need to keep in mind:

1. According to Akerman LLP, only the overtime premium required by the FLSA qualifies. Overtime mandated by state law or contracts (e.g., daily overtime) is not eligible.

2. Available to both itemizers and standard deduction filers, since it’s an above-the-line deduction.

3. Income limitations apply to be phased out for taxpayers with modified adjusted gross income (MAGI) above $150,000 (single) or $300,000 (joint).

Additional Restrictions To Keep In Mind:

• Filers must include a valid Social Security Number.
• Married couples must file jointly to claim.
• Taxpayers filing separately generally cannot claim Practical Example Of How The No Tax On Overtime Law Will Work

Let’s consider a single worker earning $25/hour, working 50 hours in a week:

Regular pay: 40h × $25 = $1,000

Overtime premium: 10h × ($12.50) = $125

That $125 is the deductible portion. Over a year, if this happened consistently, the total premium could exceed the $12,500 cap—but only $12,500 would be deductible. The actual tax benefit depends on their marginal rate.

Read Also: Can a Tax Attorney Help if I’m Accused of Tax Fraud or Evasion?

Did The IRS Provide Guidance On Tax Filing?

As I have already stated, for Tax Year 2025, existing forms and withholding tables remain unchanged. This means that the employers should report overtime as usual, without segregation on W-2s or 1099s.

However, as stated by the IRS, transition relief is in place for the tax year 2025, giving time for systems to adapt. This relief will be provided for “taxpayers claiming the deduction and for employers and payors subject to the new reporting requirements.”

Additionally, Littler Mendelson P.C. stated that Draft Form W-2 for 2026 now includes Box 12 codes “TP” (tips) and “TT” (qualified overtime compensation), and new Box 14b for occupation codes.

Note: The IRS will release more guidance soon.

Your Legal Guide: What Is The Future Outlook Of The No Tax On Overtime Law?

While the law ends after 2028, its fate could change.

For instance, New York Post mentioned how several worker advocacy groups—like the International Association of Fire Fighters—have already shown support. Depending on political and economic shifts, Congress may extend or modify it.

The No Tax on Overtime provision is a targeted tax incentive aimed at giving working Americans more benefits from their additional hours. However, it’s tightly structured, temporary, and not universally accessible.

That said, for those eligible, it could represent meaningful tax savings in the 2025–2028 window. Employers and taxpayers alike must stay informed as IRS guidance and implementation evolve.