Sounds great, no taxes on overtime. But what does it really mean?
The new tax break doesn’t completely eliminate taxes on overtime earnings, but if you qualify, it could mean more money in your pocket.
The One Big Beautiful Bill Act (OBBBA) was signed into law on July 4, 2025, and included several new tax breaks. One is a new deduction for overtime pay.
The deduction is temporary and effective for tax years 2025 through 2028 for overtime pay under Section 7 of the Fair Labor Standards Act (FLSA), and affects about 143 million people. Taxpayers can deduct part of salary that exceeds their regular rate of pay, so if you get time and a half, you can deduct half. Put another way, not all the overtime you earn is deductible. Only wages above your regular rate are deductible and the amount is limited.
The maximum deduction for not paying overtime taxes is $12,500 or $25,000 for joint filers, and phases out based on income level, starting at $150,000 for single filers and $300,000 for joint filers.
The FLSA requires payment of at least the minimum wage for all hours worked and overtime of no less than one and a half hours for hours worked in excess of 40 hours, but as you can imagine, there are exceptions.
Determining if you’re eligible can be a little confusing, and there are a lot of caveats. Some information from the Department of Labor may help.
The tax deduction is available whether you itemize deductions or claim the standard deduction on your tax returns. Once your income reaches $275,000 (single filers) or $550,000 (joint filers), you can no longer claim the deduction.
In order to file, you’ll need a Social Security number, and if you’re married, you’ll need to file jointly to claim the deduction.
Employees who are paid by the hour and other non-exempt employees are entitled to deduct their overtime. Most salaried employees generally do not qualify. Even if you are eligible for the federal overtime tax deduction, some state and other payroll taxes may still apply.
In order to claim the deduction, you first need to know how many overtime hours you worked.
Employers are not required to account for overtime separately for fiscal year 2025, but could do so. Your overtime pay may appear on a Form W-2, Form 1099-NEC, or Form 1099-MISC.
Since there are many ways for employers to document and pay employees, the IRS says taxpayers can use what they have to approximate overtime, at least by 2025.
So, for example, if you worked and earned a total overtime amount of $15,000, your qualified overtime hours are $5,000. The $15,000 is divided by three to get half time and a half pay.
If your overtime rate is double, calculate the amount of overtime by taking the total amount and dividing it by four. So, if you earned $20,000 in overtime, $5,000 would be the amount of qualified overtime.
For tax year 2026, employers must include the total amount of qualified overtime hours on a Form W-2 or Form 1099. That means 2025 is a transition year of sorts.
The deduction of overtime does not occur automatically. To claim it, you must complete a Schedule 1-A (Form 1040).
If you itemize your taxes, this schedule is in addition to Schedule A.
To complete Schedule 1-A, you will need a calculator and some basic math skills. It is a two-page form and you only need to complete the parts that apply to you.
President Trump’s One Big Beautiful Bill Act (OBBBA) was signed into law on July 4, 2025, and included several changes to tax deductions, including an overtime tax deduction.
No, the tax deduction for overtime is until tax year 2028.
Yes. You must file a Schedule 1-A and attach it to your Form 1040.