Under the July 4, 2025 law, qualifying workers can deduct a portion of their overtime pay from federal taxable income for Tax Years 2025–2028. This guide explains eligibility, income limits, annual caps, and employer reporting—plus step-by-step checklists for U.S. individual taxpayers and payroll teams.
Updated: August 15, 2025 • Audience: U.S. Individual Taxpayers • Keywords: no tax on overtime 2025, overtime deduction cap $12,500, married filing jointly $25,000, phase-out $150k/$300k, W-2 reporting 2025, payroll withholding, FLSA time-and-a-half, federal income tax deduction
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Table of Contents
1) What Counts as “No Tax on Overtime”
Qualified Overtime Compensation
The overtime premium required by the Fair Labor Standards Act (FLSA)—the “extra half” in time-and-a-half—paid for hours over 40 in a workweek.
Federal Income Tax Deduction
This is an above-the-line deduction against federal taxable income. It does not remove overtime from FICA (Social Security/Medicare) or state taxes unless a state follows similar rules.
Effective Years
Applies to qualifying overtime earned in 2025, 2026, 2027, and 2028 (unless extended by future law). Retroactive to Jan 1, 2025.
Important: Only the premium portion of overtime qualifies (the extra 0.5×). Regular straight-time wages are not part of this deduction.
2) Who Qualifies (Employees Only)
Generally Eligible
- Non-exempt W-2 employees receiving FLSA-required overtime premiums.
- Workers with a valid SSN filing a U.S. return.
- Married couples generally must file MFJ to claim this deduction.
Generally Not Eligible
- Exempt/salaried employees without FLSA overtime premiums.
- Overtime required only by state law or union contract (not FLSA).
- MFS filers and individuals without an SSN.
Gig/1099 workers: Independent contractors do not claim the overtime deduction. Consider normal business deductions on Schedule C instead.
3) Income Limits & Annual Caps
| Filing Status | Max Annual Overtime Deduction | Phase-Out Begins (MAGI) | Fully Phased Out (approx.) |
|---|---|---|---|
| Single / HOH | $12,500 | $150,000 | ~$400,000 |
| Married Filing Jointly | $25,000 | $300,000 | ~$550,000 |
| Married Filing Separately | Not eligible under statute | — | — |
Heads-up: Income thresholds are based on modified AGI. The deduction amount cannot exceed your eligible overtime premium for the year.
4) How Workers Claim the Deduction
- Keep records: Pay stubs and employer statements showing hours, regular rate, and overtime premium.
- Confirm eligibility: Non-exempt W-2 employee; overtime is FLSA-required premium.
- Calculate your premium: Identify only the 0.5× portion of time-and-a-half.
- Apply the cap & phase-out: Use your MAGI to see if the deduction is reduced or disallowed.
- Claim on your return: Enter as an above-the-line deduction for TY 2025–2028 (form/instructions per IRS guidance).
Withholding: Employers continue normal withholding. Any tax reduction occurs when you file and claim the deduction.
5) Employer Reporting & Payroll Withholding
What Employers Do in 2025
- Continue normal payroll withholding (FIT, FICA, FUTA) for overtime—no reduction at the paycheck level.
- Track FLSA overtime premium separately in payroll systems to support employee deductions.
- W-2 reporting: Await IRS instructions for how to show the annual overtime premium (e.g., a designated code/Box 14 or other method).
- Info returns & 941: For TY 2025, IRS has indicated no changes to withholding tables; further reporting guidance is expected.
Suggested Payroll Controls
- Configure a distinct overtime-premium earning code (the 0.5× portion).
- Store audit trail: hours, regular rate, premium calc, and pay periods.
- Provide employees with year-end statements summarizing overtime premium paid.
- Update handbooks and manager training on timekeeping accuracy.
Key point: The employee—not the employer—claims the deduction on the tax return. Employers supply accurate wage statements so employees can compute it.
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6) Real-World Examples
Example A — Non-Exempt Retail Worker (Single)
Facts: MAGI $95,000; 300 OT hours at $20/hr regular rate. Overtime premium = 0.5×$20×300 = $3,000.
Result: Can deduct $3,000 (under $12,500 cap; below phase-out). FICA still applies to full wages.
Example B — Married Filing Jointly Near Phase-Out
Facts: MAGI $310,000; OT premium total $18,000.
Result: Deduction is partially reduced by phase-out rules; cannot exceed $25,000 cap even before reductions.
Example C — Exempt Professional
Facts: Salaried exempt engineer; no FLSA overtime premiums.
Result: Not eligible for the overtime deduction.
Example D — Union Overtime Not Required by FLSA
Facts: Overtime paid solely per CBA beyond FLSA requirements.
Result: Not qualified for the federal overtime deduction; check state law for any separate benefits.
7) Frequently Asked Questions
Is overtime now tax-free?
No. You get an income tax deduction at filing time for the overtime premium. Regular withholding and FICA still apply to paychecks.
Do I need to itemize to claim this?
No. This is an above-the-line deduction available whether or not you itemize.
Does overtime paid under state law qualify?
Generally no if it’s not also required by the FLSA. The law targets the federal overtime premium.
How will it show on my W-2?
Employers will follow IRS reporting instructions (e.g., a designated code/Box 14 or similar). Until finalized, many will show the overtime premium total in an informational box.
Can I change my 2025 withholding now?
Employers are keeping standard tables for 2025. Most taxpayers will see benefits when they file their 2025 return in 2026.
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Update Watch: Monitor IRS releases for final W-2 reporting instructions, any transition relief, and confirmations of MAGI thresholds and annual caps. Keep detailed pay stubs and employer statements to substantiate your deduction.
