If you’ve spent any time working late nights or grinding through a 50-hour week recently, you’ve probably heard the buzz. There’s this idea floating around that the IRS is finally going to stop dipping into your overtime pay. It sounds like a dream, right? Honestly, for a lot of people, it’s basically the biggest change to their take-home pay in years.
But let's be real—tax laws are never as simple as a campaign slogan. You can’t just look at your next paycheck and expect the federal withholding to suddenly drop to zero because you worked an extra Saturday.
Here is the deal: The "no tax on overtime" policy is officially part of the One Big Beautiful Bill Act (OBBBA), which President Trump signed into law on July 4, 2025.
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Because this happened mid-year, the rollout is a bit of a scramble. If you're wondering when this actually kicks in for you, the answer is both "right now" and "not until next year," depending on how you look at it.
When does the no tax on overtime take effect?
The law is technically retroactive to January 1, 2025.
That means any qualified overtime you’ve worked since the start of 2025 counts. However, because the law wasn't signed until July, most employers didn't have their payroll systems ready to stop taking taxes out immediately. You’ve likely still been seeing taxes disappear from your overtime hours all through the year.
You’ll get that money back—sorta.
Since it’s a deduction you claim on your tax return, the first time you’ll actually feel the "no tax" benefit is when you file your 2025 tax return in early 2026. That’s the moment you’ll sit down with your 1040 and realize you can knock a chunk of that overtime pay off your taxable income.
The 2026 Shift: Seeing it in Your Paycheck
While 2025 is the "catch-up" year where you claim it as a refund, 2026 is when things change at the source. The IRS has been working on new withholding tables. For the 2026 tax year, many employers are expected to update their systems so that federal income tax isn't withheld from the "qualified" portion of your overtime in the first place. You’ll see a higher net amount on your pay stubs as the year goes on, rather than waiting for a big check from Uncle Sam a year later.
How the "No Tax" Math Actually Works
Don't let the name fool you. It’s not that your entire overtime check is invisible to the IRS. The law specifically targets the overtime premium.
Think about it like this: If you make $20 an hour and work overtime, you usually get "time-and-a-half," which is $30.
- $20 is your regular rate.
- $10 is the "half" part (the premium).
The "No Tax on Overtime" deduction applies specifically to that $10 premium. You still pay regular income tax on the base $20, even if those hours were worked at 2:00 AM on a Tuesday.
The Caps and Limits
There’s no such thing as a free lunch, and there are definitely limits on how much you can deduct.
- Individual Filers: You can deduct up to $12,500 of qualified overtime premium per year.
- Married Filing Jointly: The cap jumps to $25,000.
- The Phase-Out: If you’re making high-six figures, this isn't for you. The benefit starts to disappear (phase out) once your modified adjusted gross income (MAGI) hits $150,000 for individuals or $300,000 for joint filers. By the time an individual hits $275,000, the deduction is gone.
Who is actually eligible?
This is where things get a bit "inside baseball." To qualify, your overtime has to be "Qualified Overtime Compensation" as defined by Section 7 of the Fair Labor Standards Act (FLSA).
Basically, if you’re a "non-exempt" employee—meaning your boss is legally required to pay you time-and-a-half for anything over 40 hours a week—you’re likely in the clear.
But if you’re a salaried "exempt" worker (like a manager or a software engineer with a high base salary) and your company gives you a "bonus" for extra hours, that might not count. The IRS is looking for that specific FLSA-mandated overtime pay.
Also, keep in mind that this is a federal income tax break.
- Payroll Taxes: You still have to pay Social Security and Medicare (FICA) on every cent of overtime.
- State Taxes: Unless your specific state (like Wisconsin, which recently moved to match the federal law) passes its own bill, you’ll probably still owe state income tax on that overtime.
What you need to do right now
For the 2025 tax year (the one you file in 2026), things are a little messy. The IRS gave employers "transition relief," which is just government-speak for "we know you weren't ready for this."
Employers aren't strictly required to have a separate "Overtime" box on your 2025 W-2. If your W-2 doesn't show it, the IRS allows you to use a "reasonable method" to estimate your overtime premium.
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Pro Tip: Look at your final pay stub for 2025. It usually has a "Year-to-Date" (YTD) column for overtime. If it just shows one big number for overtime, the IRS generally allows you to treat one-third of that total as the deductible "premium" portion (the "half" in time-and-a-half).
Looking ahead to 2026 and 2027
By the time 2026 rolls around, the paperwork gets cleaner. The IRS has introduced Code TT for Box 12 on the W-2. Your employer will use this code to report exactly how much qualified overtime you earned. This makes filing your taxes way easier because you won't have to do the math yourself.
Is this permanent?
Nope.
Just like many tax cuts, this one has an expiration date. As of now, the "No Tax on Overtime" provision is scheduled to expire on December 31, 2028.
Congress would have to pass another bill to keep it going after that. It’s basically a four-year trial run to see if it actually encourages people to work more or if it just creates a giant hole in the federal budget.
Your Action Plan for Overtime Savings
To make sure you actually see this money, don't just wait for it to happen.
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- Audit your pay stubs: Make sure your employer is correctly categorizing your "FLSA Overtime." If it’s labeled as a "discretionary bonus," you might lose the deduction.
- Talk to your payroll department: Ask if they plan to update your Form W-4 for 2026. If they stop withholding tax on your overtime, you’ll see the money in your pocket every week instead of waiting for a refund.
- Track your hours: Since 2025 is a transition year, keep your own records of your overtime pay. If your W-2 comes back in January 2026 without a clear breakdown, you'll need your own data to claim the deduction accurately.
- Check your state status: Google your state’s department of revenue to see if they’ve "coupled" with the federal OBBBA. If they haven't, remind yourself to set aside a little extra for the state's cut of that "tax-free" money.
The "no tax on overtime" era is here, but it requires you to be a bit more hands-on with your taxes than usual. Get your records in order now so that when 2026 filing season hits, you aren't leaving your hard-earned money on the table.