How does no tax on overtime work? You can deduct up to $12,500 of qualified overtime compensation per year ($25,000 if filing a joint return). A single filer who earns $8,000 in qualified overtime can deduct the full $8,000 since it's under the $12,500 cap.
No tax on overtime pay
OBBBA allows eligible workers to deduct "qualified overtime pay" on federal returns. The break is capped at $12,500 for single filers or $25,000 for married couples filing jointly. This tax break phases out for higher earners. This is a tax break only for overtime pay, not all wages.
Overtime pay is taxed as ordinary income but is eligible for a new federal deduction (2025-2028) reducing taxable income by up to $12,500 ($25k joint), though payroll taxes (Social Security/Medicare) and state/local taxes still apply. The deduction lowers your federal tax bill but doesn't make overtime tax-free, and your employer still withholds taxes as usual, with the deduction claimed on your tax return.
No Tax on Overtime Will Reduce Federal Revenues
The Joint Committee on Taxation estimates that the deduction will reduce revenues by $90 billion over the 2025 to 2034 budget period. However, that cost all occurs over the next four years, as the deduction is currently set to expire in 2028.
Seven major tax cuts took effect for 2025 under the OBBBA:
The "No Tax on Overtime" is a new federal income tax deduction (for 2025-2028) from the One Big Beautiful Bill Act (OBBBA) that allows eligible workers to deduct the "premium" portion (the extra half in time-and-a-half pay) of their overtime from their taxable income, up to $12,500 ($25,000 joint), reducing their AGI, but it's not a full exemption, as regular pay and payroll taxes (FICA) still apply, with income phase-outs.
"Read my lips: no new taxes" is a phrase spoken by American presidential candidate George H. W. Bush at the 1988 Republican National Convention in New Orleans as he accepted the nomination on August 18.
Did the no tax on overtime pass? Yes. The no tax on overtime bill was included in the One Big Beautiful Bill that President Trump signed into law in July 2025.
The IRS doesn't have a special "overtime tax rate" that penalizes you for working extra shifts. Your employer is just withholding more dollars because you earned more dollars. Here's why: That withholding is an estimate based on the assumption that you'll earn this higher amount every paycheck for the entire year.
Perhaps the most notable difference will be how employers report overtime pay on Forms W-2, 1099-NEC, 1099-MISC, and 1099-K. Starting with forms completed for the 2026 tax year, employers will have to separately report overtime pay on those forms, rather than just include it with other compensation or payments.
Working overtime often isn't worth it due to serious health risks (stress, fatigue, heart issues), decreased productivity and focus, burnout, poor work-life balance, higher accident rates, and potentially diminishing financial returns from taxes, all while negatively impacting personal life, relationships, and overall well-being. While it offers extra pay, the hidden costs to health and personal time usually outweigh the benefits, especially if consistent, says this analysis from CreditNinja and this post on Indeed.
For a $17.50/hour rate, overtime pay (typically time-and-a-half) is $26.25 per hour ($17.50 x 1.5) for hours worked over 40 in a week, resulting in $420 for 8 hours of overtime, or an extra $210 on top of regular pay for 8 overtime hours. The basic calculation is your hourly rate (e.g., $17.50) multiplied by 1.5 (for time-and-a-half) and then by the number of overtime hours worked.
If the individual tax cuts expire, taxpayers in all income groups would face higher and more complicated taxes. Machinery and equipment expensing is a key provision that, if allowed to expire, would especially harm capital-intensive industries like manufacturing.
The standard deduction increased for 2025 and 2026, and a new temporary “bonus” deduction for adults 65 and older begins in 2025. The child tax credit increased to $2,200 for the 2025 and 2026 tax years; retirement plan contribution limits for IRAs and 401(k)s also increased for 2026.
The Congressional Budget Office (CBO) estimated in 2018 that the 2017 law would cost $1.9 trillion over ten years, and recent estimates show that making the law's temporary individual income and estate tax cuts permanent would cost roughly another $4.2 trillion through 2035.
Starting January 1, 2025, a designated amount of qualifying overtime pay will be exempt from federal income tax under the One Big Beautiful Bill Act (OBBBA). You can deduct up to $12,500 (for most filers) or $25,000 (Married Filing Jointly) in overtime pay from your taxable income.
The "No Tax on Overtime" provision (part of the 2025 OBBB Act) works as a federal income tax deduction, allowing eligible employees to reduce taxable income by the premium portion (the extra half) of their time-and-a-half pay, up to $12,500 ($25,000 joint), for tax years 2025-2028, phasing out at higher incomes but still subject to payroll taxes.
On July 4, 2025, Congress enacted US Public Law 119-21, also known as the One Big Beautiful Bill Act. In that law, there is a provision called “No Tax on Overtime.”
Under the law, there were numerous changes to the individual income tax, including changing the income level of individual tax brackets, lowering tax rates, and increasing the standard deductions and family tax credits while itemized deductions are reduced and the personal exemptions are eliminated.
Trump Tax Plan Changes: Standard Deduction
The 2017 Trump tax law (TCJA) nearly doubled the standard deduction for all filers, and OBBB bumped them up. If you're a single filer or if you're married filing separately, your standard deduction for 2025 rose to $15,750 under OBBBA.
Tax policy
It extended the Bush tax cuts for roughly the bottom 99% of income earners (those earning below $400,000, or $450,000 for married couples). Capital gains, dividends, and estate tax rates were also increased relative to the 2003–2012 levels; these also mainly affect high-income and wealthy households.
Clinton signed the Omnibus Budget Reconciliation Act of 1993 into law on August 10, 1993. The law created a 36 percent to 39.6 percent income tax for high-income individuals in the top 1.2% of wage earners. Businesses were given an income tax rate of 35%. The cap was repealed on Medicare.