More than 60% of Americans work in occupations that are eligible for overtime pay, with about 20 million workers regularly receiving overtime hours (The White House).
Overtime taxation has undergone a significant transformation with the passage of recent federal legislation. On July 3, 2025, the U.S. Congress passed its “One Big Beautiful Bill,” (OBBB) that includes a No Tax on Overtime provision. President Trump signed the bill into law on July 4. This legislation introduces substantial changes to how overtime compensation is taxed.
For employers, understanding these overtime changes is important for proper payroll management, tax planning, and compliance. This guide covers the new No Tax on Overtime bill, from eligibility to implementation, and what it means for your business.
What Is the No Tax on Overtime Bill?
No Tax on Overtime is part of the OBBB, a tax reform package that became law on July 4, 2025.Beginning with the 2025 tax year, the No Tax On Overtime Act lets workers below certain income thresholds deduct up to $12,500 in “qualified overtime compensation” ($25,000 on a joint return) from their federal income taxes.
It’s important to understand that this legislation doesn’t end taxes on all overtime pay; it provides a tax deduction that can reduce the federal income tax burden on overtime earnings. Also, the exemption only applies to federal income tax. Federal payroll tax — the flat tax split between employers and employees to fund Social Security and Medicare — still applies to overtime compensation.
Why Was the No Tax on Overtime Bill Introduced?
The No Tax on Overtime Bill was introduced as part of a broader tax reform effort to support working Americans.
The legislation aims to encourage productivity and reward workers who contribute extra hours. By reducing the tax burden on overtime earnings, lawmakers sought to make overtime work more financially attractive to employees while supporting businesses that rely on flexible workforce scheduling.
Note: President Trump has called for a permanent extension of the 2017 tax cuts, and additional policies, including no taxes on tips and Social Security benefits for retirees.
When Does Trump’s No Tax on Overtime Start?
No tax on overtime retroactively begins on Jan. 1, 2025, and will remain in place through 2028. This means overtime compensation earned starting January 1, 2025, is eligible for the new tax deduction, even though the bill was signed on July 4, 2025. Important details about this legislation include:
- Employees who have already worked overtime in 2025 can benefit from these tax savings when they file their 2025 tax returns.
- The deduction phases out for those who earn more than $150,000 annually.
- This tax exemption is available for tax years 2025 through 2028, aligning with the end of President Trump’s term.
Note: The No Tax on Overtime Act is currently federal legislation, and state tax treatment may differ. Employees should consult with their tax advisors about how their state handles overtime taxation.
How Does No Tax on Overtime Work?
No Tax on Overtime operates as a federal income tax deduction. Here’s how it works:
- Deduction Structure: Workers below certain income thresholds can deduct up to $12,500 in “qualified overtime compensation” ($25,000 for joint filers) from their federal taxable income. This deduction is taken when filing annual tax returns.
- Income Limits: The deduction phases out for those earning $150,000 or more, meaning higher-income earners may receive a reduced benefit or no benefit at all.
- Payroll Tax Considerations: Federal payroll tax still applies to all overtime compensation.
- Withholding Changes: For 2025, the Senate bill requires no change in income tax withholding and presumably no changes to Form W-4, though this may change for future tax years.
Who Qualifies for No Tax on Overtime?
The qualification for the no tax on overtime depends on employment classification, income levels, and legal work status. Here’s how it breaks down for hourly and salaried employees:
Hourly Wage Employees
Hourly employees—such as nurses, law enforcement, and first responders—are the main beneficiaries of the provision. To qualify, workers must:
- Be classified as non-exempt employees under the Fair Labor Standards Act (FLSA)
- Work more than 40 hours per week at a rate not less than time and one-half their regular rate of pay
- Have a Social Security number, meaning some immigrants and those without proper documentation may not qualify
Salaried Employees
Salaried employees may also qualify for no tax on overtime benefit, but their eligibility is a bit more complicated:
- Employees must be classified as non-exempt employees eligible for overtime under FLSA
- Overtime compensation must meet federal guidelines for qualified overtime
- Make less than $150,000 per year, which is the annual income threshold set by the legislation
- Must maintain proper documentation of hours worked and overtime earned
Many salaried employees are exempt from overtime under FLSA, making them ineligible for this tax benefit. However, some salaried workers in lower-wage positions may be entitled to overtime compensation and would qualify for the no tax on overtime deduction.
How will No Tax on Overtime Affect Employers?
The No Tax on Overtime legislation creates a few important considerations for employers:
Payroll Administration
While the immediate effect on payroll processing is minimal for 2025, employers should prepare for potential changes in withholding requirements for future years. Changes to withholding requirements after 2025 may require system updates.
Record Keeping
Employers will need to keep detailed records of overtime hours and compensation to support employee tax deductions. This includes proper classification of employees and accurate tracking of hours worked beyond 40 per week.
Workforce Management
The tax benefit may make overtime work more attractive to employees, possibly affecting workforce management and scheduling. Employers should consider how this might change their overtime usage.
How Will No Tax on Overtime Affect Employees?
The no tax on overtime bill also offers significant benefits to eligible workers:
Increased Take-Home Pay
While the deduction is claimed on tax returns rather than reducing immediate withholding, employees can expect larger tax refunds or reduced tax liabilities when filing. The White House has a calculator for employees to determine their savings and estimate how much eligible employees might save.
Overtime Incentive
The tax benefit makes overtime work more appealing, potentially prompting employees to take on more hours when available.
Financial Planning
Changes in tax law can be difficult to navigate. As such, employees should work with tax professionals to understand how the overtime deduction affects their overall tax situation and whether they need to adjust their withholding or estimated tax payments.
Documentation Requirements
Workers should keep careful records of their overtime hours and compensation to support their tax deductions, including pay stubs and timekeeping records, in the event of an IRS audit.
Stay Compliant with No Tax on Overtime
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No Tax on Overtime FAQS
Still have questions about the no tax on overtime? Here are answers to some common questions:
Is Overtime Pay Taxable?
Yes. The amount employees earn from working overtime won’t be completely tax free. The exemption only applies to federal income tax. Overtime pay is still subject to federal payroll taxes (Social Security and Medicare) and potentially state income taxes, depending on your state’s tax laws.
Did the No Tax on Overtime Act Pass?
Yes, No Tax on Overtime passed as part of the One Big Beautiful Bill Act. On July 3, 2025, the U.S. Congress passed the “One Big Beautiful Bill,” and President Trump signed the bill into law on July 4.
Does No Tax on Overtime Apply to State Taxes Too?
No Tax on Overtime only applies to federal income taxes. State tax treatment varies by state, and each state will decide whether to conform to the federal changes or keep their own overtime taxation policies.
Is There an Income Cap for the No Tax on Overtime Bill?
Yes, the deduction does phase out for those who earn $150,000 and up. The exact phase-out structure means that higher-income earners may receive reduced benefits or no benefit at all from the overtime tax deduction.
Do Employers Report No Tax on Overtime Separately on W-2s?
Current guidance suggests that for 2025, standard W-2 reporting procedures stay in place. However, employers should monitor for potential changes to reporting requirements for future tax years as the IRS provides additional guidance.
Are Salaried Employees Covered by No Tax on Overtime?
Salaried employees may be covered if they are classified as non-exempt under the Fair Labor Standards Act (FLSA) and are eligible for overtime compensation. Many salaried employees are exempt from overtime requirements and wouldn’t qualify for this tax benefit.
Does Union-Negotiated Overtime Fall Under the No Tax on Overtime Bill?
Union-negotiated overtime compensation qualifies for the no tax on overtime deduction.
Note: It must meet the federal definition of qualified overtime compensation under Section 7 of the Fair Labor Standards Act of 1938 and the employee must meet all other eligibility requirements.
How was Overtime Taxed Before Trump’s No Tax on Overtime Bill?
Before this legislation, overtime compensation was taxed as regular income at the employee’s marginal tax rate for both federal and state income taxes, in addition to payroll taxes. The overtime premium (typically time-and-a-half) was fully taxable, making overtime work less financially attractive to some employees due to the higher tax burden on the additional income.