One of the standout features of the 2025 tax legislation is a new provision that makes qualified overtime pay tax-free for tax years 2025 through 2028. This change is expected to benefit millions of workers across the country who regularly put in extra hours. However, as with any tax break, there are important rules to follow to ensure compliance and avoid costly mistakes.
Under this new provision, eligible workers will be able to deduct up to $12,500 of overtime pay from their taxable income each year. For married couples filing jointly, the deduction increases to $25,000. This tax break applies whether or not you itemize deductions on your tax return.
To qualify for this deduction:
The overtime must be paid in accordance with the Federal Labor Standards Act (FLSA) of 1938, which requires that covered, nonexempt employees receive “time and a half” pay for hours worked beyond 40 in a single workweek.
The deduction is available only to workers who actually earn legitimate overtime. It is not an opportunity for business owners, executives, or professionals (such as doctors, lawyers, or CPAs) to reclassify their salaries as hourly wages in order to claim overtime. Many white-collar positions are exempt from overtime rules based on their job duties or pay level.
Positions generally not eligible for this tax-free overtime include:
Executive, administrative, and professional employees
Computer professionals
Outside sales employees
Certain agricultural workers
To benefit from the full deduction:
Your Modified Adjusted Gross Income (MAGI) must be $150,000 or less for single filers or $300,000 or less for married couples filing jointly.
The deduction phases out gradually for higher incomes and disappears entirely when MAGI reaches $275,000 for individuals or $550,000 for couples.
It’s also important to note that married couples must file jointly to claim the deduction. Those filing as Married Filing Separately will not qualify.
Since current W-2 Forms do not separately report overtime pay, changes will be necessary to allow both taxpayers and the IRS to properly track these amounts. For the 2025 tax year, which is already underway, the IRS will permit employers to use any reasonable method specified by the Treasury Secretary to approximate and account for qualifying overtime.
Looking ahead to 2026 and beyond, the Treasury Department is required to update payroll withholding procedures to ensure that the overtime deduction is reflected in employees’ income tax withholdings.
If you earn overtime or manage a workforce where overtime is common, it’s a good idea to start planning now:
Employees: Keep clear records of your overtime hours and pay.
Employers: Work with your payroll provider to ensure accurate tracking and compliance.
High-income earners: Review your income levels to understand whether you’ll qualify for the deduction.
As always, tax law changes can be complex, and everyone’s situation is unique. If you have questions about how these updates impact you, or if you need help navigating the new rules, reach out to an Alloy Silverstein professional. We’re here to help you every step of the way.
Associate Partner
Julie has over 20 years of experience in public and private accounting, representing varied clientele including the medical, legal, and real estate industries and trusts.
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