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The U.S. government has officially introduced a new tax deduction under the One Big Beautiful Bill Act (OBBB), allowing employees to deduct overtime pay from taxable income. Popularly known as the “No Tax on Overtime” rule, this policy applies to income years 2025 through 2028.
In this article, we’ll break down everything — who qualifies, how much you can deduct, how to calculate it, and what the IRS reporting rules mean for you.
What Is the “No Tax on Overtime” Deduction?
The “No Tax on Overtime” provision is part of the OBBB Act (Public Law 119-21) signed on July 4, 2025. It provides a temporary above-the-line deduction for overtime pay.
Under this rule, employees can deduct the premium portion of overtime pay (the extra “half” of time-and-a-half) from their gross taxable income.
Example:
If your regular hourly rate is $25, overtime rate = $37.50/hour.
You can deduct the $12.50/hour portion that represents the “half” from your taxable income.
How Long Does the Overtime Deduction Last?
✅ Effective period: 2025–2028
✅ Applies to both:
- W-2 employees
- Independent contractors (Form 1099)
IRS Transition Relief: The IRS has confirmed (via FS-2025-03) that taxpayers and employers will receive leniency for 2025 due to reporting system updates.
Eligibility Criteria
To qualify for the “No Tax on Overtime” deduction:
- Must receive qualified overtime pay required under the Fair Labor Standards Act (FLSA).
- Must file your Social Security Number on the return.
- Must file jointly if married to claim the deduction.
- The deduction is available even for non-itemizers (above-the-line).
- Overtime pay must appear on Form W-2, 1099, or other official statement.
Maximum Deduction Limits
| Filing Status | Max Annual Deduction | Phase-Out Income Limit |
| Single | $12,500 | $150,000 |
| Married (Joint) | $25,000 | $300,000 |
Once your Modified Adjusted Gross Income (MAGI) exceeds these limits, the deduction gradually reduces.
No Tax on Overtime Calculator (Interactive Guide)
Calculator formula:
[Deduction = (Overtime Rate – Regular Rate) × Total Overtime Hours]
Example:
Regular rate = $25/hr
Overtime rate = $37.50/hr
Overtime hours = 60
Deduction = ($37.50 – $25) × 60 = $750 deductible from taxable income
How to Claim the Deduction
- Collect your W-2 or 1099 from employer.
- Find your total overtime hours and rates.
- Use the formula or calculator.
- Enter deduction under “Adjustments to Income” on your 1040.
- Keep employer statement as proof for audit.
IRS Reporting & Employer Requirements
- Employers must report total “qualified overtime pay” in Box 12 (Code PP) on the 2026 Form W-2.
- They must file an information return with IRS or SSA.
- A “reasonable methods” approach is allowed in 2025.
- Transition relief will apply during the first year.
How It Affects AGI and Tax Credits
Since this deduction reduces Adjusted Gross Income (AGI), it may affect:
- Child Tax Credit eligibility
- Education credits
- ACA Premium Tax Credits
Federal vs State Tax
Some states (like California or New York) may not conform to federal changes immediately. That means your state income tax might still apply to overtime pay.
Tip: Always check your state Department of Revenue for updates.
External link:
🔗 IRS Official Fact Sheet – FS-2025-03
PDF Download Section No Tax on Overtime Calculator
“Download your free IRS-approved overtime deduction calculator and track your savings easily!”
FAQs (15 Most Asked Questions)
What is the No Tax on Overtime law for 2025?
The No Tax on Overtime provision, introduced under the One Big Beautiful Bill Act (OBBBA), allows employees to deduct qualifying overtime pay from federal taxable income between 2025 and 2028.
How much overtime income is tax-free under the OBBBA?
You can deduct up to $12,500 (single filers) or $25,000 (married filing jointly) of overtime income from your taxable income.
Who qualifies for the No Tax on Overtime deduction?
Only W-2 employees who earn federally qualified overtime pay—usually time-and-a-half for hours worked beyond 40 hours per week—can claim this deduction.
Is the No Tax on Overtime available to independent contractors?
No. Independent contractors and gig workers who receive Form 1099 are not eligible for the overtime deduction.
How can I calculate my overtime deduction using the No Tax on Overtime Calculator?
Use our free online Overtime Tax Calculator to estimate how much of your overtime pay qualifies for deduction based on your income, hours worked, and filing status.
Does the No Tax on Overtime affect Social Security and Medicare taxes?
No. The deduction only applies to federal income tax. Social Security and Medicare taxes still apply to overtime pay.
What is considered “qualified overtime pay”?
Qualified overtime means premium pay (the extra half of time-and-a-half) earned under the Fair Labor Standards Act (FLSA) for eligible employees.
How long will the No Tax on Overtime deduction last?
The deduction applies from January 1, 2025, through December 31, 2028 — unless Congress extends it.
What happens if I earn more than the income limit?
The deduction starts to phase out above $150,000 (single) or $300,000 (married filing jointly).
Do employers need to report overtime separately on the W-2?
Yes. Employers must report qualifying overtime pay separately on the W-2 form, expected to use a new Box 12 code “PP” starting in 2026.
Will my state also exclude overtime pay from taxes?
Not necessarily. Some states may not conform to the federal OBBBA rules, so check your state’s Department of Revenue or use our calculator for state-specific guidance.
Can I claim the overtime deduction if I file Married Filing Separately?
No. The OBBBA specifically excludes Married Filing Separately filers from claiming the deduction.
Will claiming the No Tax on Overtime change my AGI?
Yes. Since it’s an above-the-line deduction, it reduces your Adjusted Gross Income (AGI) — which may affect your eligibility for other credits or benefits.
What documents should I keep for my overtime deduction?
Keep your W-2, pay stubs showing overtime breakdown, and any employer-issued statements to verify your claim in case of IRS review.
Where can I find official IRS updates about the OBBBA?
You can check the IRS official page on Overtime Deduction or follow Thomson Reuters’ Overtime Deduction Insights for professional tax updates.
