You’ve probably heard the rumors flying around the breakroom or seen the headlines popping up on your feed lately about a massive shift in how the IRS looks at your extra hours. The question everyone’s asking is simple: is there no taxes on overtime now? Well, it depends on who you ask, but the real answer—the legal one—is a bit more nuanced than a simple "yes."
Back in July 2025, a pretty historic piece of legislation called the One Big Beautiful Bill Act (OBBBA) was signed into law. It effectively changed the game for anyone grinding out more than 40 hours a week. But if you’re expecting your next paycheck to magically show zero federal tax withheld on those late-night shifts, you might want to slow down. The law doesn't actually stop the tax from being taken out initially; instead, it gives you a way to get it back when you file.
Basically, for the tax years 2025 through 2028, there is a new federal income tax deduction for "qualified overtime compensation." It’s a huge deal, but there are some big "ifs" and "buts" involved.
What’s Actually Happening with the No Tax on Overtime Law?
The first thing you need to realize is that this isn't a total "get out of taxes free" card. The law creates a deduction, not an exemption from all types of taxes.
When people talk about the "no tax on overtime" rule, they are specifically referring to Federal Income Tax. You still have to pay Social Security and Medicare taxes (FICA). Your state might also still want its cut, depending on where you live. For example, if you’re in California or New York, the state treasury isn't necessarily following the federal lead on this one yet.
Here is the kicker: the deduction only applies to the premium portion of your overtime.
Let’s say you make $20 an hour. When you hit overtime, you usually get "time-and-a-half," which is $30. Under the new rules, the first $20 is still taxed normally. Only that "half" portion—the extra $10—is what you get to deduct. It sounds a bit stingy when you put it that way, but if you’re working hundreds of hours of overtime a year, those $10 increments add up to thousands of dollars in tax savings.
Who Actually Qualifies for This?
Honestly, not everyone gets to join the party. This is strictly for "non-exempt" employees under the Fair Labor Standards Act (FLSA).
If you’re an hourly worker in a factory, a nurse, or a retail manager who gets paid by the hour, you’re likely in. But if you’re a salaried professional—like an accountant or a software engineer—who doesn't legally get "overtime pay" even when you work 60 hours, this law doesn't do anything for you. You have to be legally required to receive overtime pay to claim the deduction.
There are also income caps you need to watch out for.
- If you’re a single filer and your Modified Adjusted Gross Income (MAGI) is under $150,000, you’re golden.
- For married couples filing jointly, that limit is $300,000.
- Once you pass those numbers, the benefit starts to "phase out." By the time a single person hits $275,000, the deduction is gone entirely.
How Do You Actually Get the Money?
This is where it gets a little messy for the 2025 and 2026 tax seasons. Because the law passed in the middle of 2025, most payroll systems weren't ready.
Your boss is still going to withhold taxes on your overtime like they always have. You won't see "tax-free" money in your weekly check. Instead, when you file your taxes (like the ones you’re doing right now in early 2026), you’ll use a new form—likely Schedule 1-A—to claim the deduction.
The IRS has set the maximum deduction at **$12,500 per person** ($25,000 for couples).
For the 2026 tax year, the IRS is making it a bit easier. They’ve updated the Form W-2. Look for Box 12 on your 2026 form; employers are now supposed to use a specific code—Code TT—to report exactly how much "qualified overtime" you earned. This makes the math way easier for you.
Common Misconceptions That Could Bite You
I’ve seen a lot of people thinking that any extra pay counts. It doesn’t.
- Double Time: If your boss is nice and pays you double time for working a holiday, the IRS still only lets you deduct the amount that would have been "time-and-a-half" under federal law.
- Contractors: If you’re a 1099 gig worker or freelancer, the rules are still a bit murky. The law specifically mentions "individuals required under section 7 of the FLSA," which usually means W-2 employees.
- Married Filing Separately: If you and your spouse file separate returns to save on student loans or other reasons, you lose this deduction. You must file jointly to claim it.
The Reality of the "Sunset" Provision
One thing the catchy headlines won't tell you is that this isn't permanent. As of right now, the "no taxes on overtime" benefit is set to expire on December 31, 2028.
Unless Congress votes to extend it, we’ll be right back to the old system in 2029. This was done to keep the "cost" of the bill down in federal budget projections, but for the average worker, it means you’ve got a four-year window to really maximize your earnings.
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If you’ve been on the fence about picking up that extra shift, the math is now heavily in your favor. Between this and the "No Tax on Tips" provision that passed at the same time, the take-home pay for service and industrial workers has seen the biggest jump in decades.
Actionable Next Steps for Workers
Check your 2025 pay stubs. Since the 2025 W-2s might not have the new "Box 12" codes yet (due to the "transition relief" the IRS gave employers), you might need to calculate your own "premium" pay. Look for the total amount you earned specifically as the 0.5x portion of your overtime.
Talk to your payroll department. Ask them if they are tracking "Qualified Overtime Compensation" for your 2026 W-2. If they aren't, they need to start using the new IRS reporting standards immediately to ensure you don't lose out on your 2027 refund.
Update your W-4. If you know you're going to work a ton of overtime and want that money now instead of waiting for a refund, you can technically adjust your withholdings on your Form W-4. Just be careful—if you over-adjust, you could end up owing the IRS at the end of the year.
Keep an eye on your MAGI. If you're close to the $150,000 (single) or $300,000 (joint) limit, consider contributing more to a traditional 401(k) or IRA. Lowering your taxable income could keep you under the threshold, allowing you to claim the full overtime deduction rather than seeing it phased out.