The “no tax on overtime” provision, introduced under the One Big Beautiful Bill Act and signed into law on July 4, 2025, has gained a lot of attention, but the name is a bit misleading.
Rather than eliminating taxes on overtime entirely, this provision creates a new deduction that eligible taxpayers can claim in addition to either the standard deduction or itemized deductions. Understanding how it works can help you take full advantage of the potential tax savings.
This deduction is temporary and applies to tax years 2025 through 2028.
Eligible taxpayers can deduct up to:
However, the deduction begins to phase out once modified adjusted gross income exceeds:
Not all overtime pay qualifies for the deduction. Only the “premium” portion, the amount earned above your regular hourly rate, can be deducted.
For example, if you earn $20 per hour and receive $30 for an overtime hour (time and a half), only the extra $10 qualifies for the deduction, not the full $30.
For the 2025 tax year, employers are not required to report qualified overtime separately. This requirement begins in 2026.
As a result, taxpayers filing in 2025 may need to calculate their eligible overtime themselves. The IRS advises taxpayers to make a reasonable estimate using available documentation, such as pay stubs or payroll reports. Employers are encouraged, but not required, to provide this information.
If your overtime pay is strictly calculated at time and a half, the process is relatively simple.
You can take your total year-to-date overtime earnings (as shown on your final pay stub of the year) and divide that number by three. The result will give you an estimate of your qualified overtime amount.
If you earn double time, such as for holidays or Sundays, the calculation becomes more complex.
Timing matters. For example, if you earn double time at the beginning of a workweek before exceeding 40 hours, that pay may not qualify at all. Additionally, how your pay period is structured (for example, whether Sunday is the first or last day of the week) can impact eligibility.
Even when double time does qualify, only the “extra” portion counts. Since double time is twice your regular rate, you would divide that overtime pay by four to determine the deductible amount.
Many employees earn a mix of time-and-a-half and double time, often combined into a single overtime figure on pay stubs.
In these cases, use any available records to make a reasonable estimate. The IRS has indicated that they are unlikely to challenge well-documented, good-faith calculations for the 2025 tax year. Just be sure to keep all supporting documentation in case questions arise.
While the “no tax on overtime” provision doesn’t fully eliminate taxes on overtime earnings, it does offer a valuable opportunity for tax savings.
Because the rules can be nuanced, especially in the early years, it’s important to understand how to calculate your deduction accurately and maintain proper documentation.
If you’re unsure how this applies to your situation, consider speaking with a tax professional to ensure you’re maximizing your benefit while staying compliant.
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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