No Tax on Overtime: What Most People Get Wrong

You've probably heard the chant at rallies or seen the flashing headlines. No tax on overtime. It sounds like a dream for anyone who has ever stared down a 60-hour work week only to see their paycheck gutted by the IRS. But honestly, the reality is a bit more complicated than a campaign slogan.

Donald Trump first tossed this idea into the ring back in September 2024 during a rally in Tucson, Arizona. He stood there and told a crowd of nurses, cops, and factory workers that the "hardest-working citizens" shouldn't be penalized for putting in extra hours. Fast forward to July 4, 2025, and it actually became law as part of the massive "One Big Beautiful Bill" (OBBBA).

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It’s real. It’s here. But "no tax" doesn't mean you just get to keep every single penny.

What No Tax on Overtime Actually Means for Your Wallet

If you’re expecting your entire overtime check to be tax-free, I hate to be the one to break it to you, but that’s not quite how it works. Basically, the law creates a specific federal income tax deduction for what they call "qualified overtime compensation."

Think of it as a haircut for your taxable income. If you earned a bunch of overtime, you can subtract a portion of it from the total income the IRS looks at when deciding how much you owe.

Here is the kicker: the deduction only covers the "extra" part of your overtime pay. If your regular rate is $20 an hour and your overtime rate is $30, only that extra $10—the 0.5x premium—is eligible for the deduction. The base $20 is still taxed like normal.

It’s also not a free-for-all. There are caps.

• Single filers can deduct up to $12,500 of that overtime premium.
• Married couples filing jointly can go up to $25,000.

If you’re a high earner, the benefits start to vanish. The deduction begins to "phase out" once your modified adjusted gross income (MAGI) hits $150,000 for singles or $300,000 for couples. For every $1,000 you earn over those limits, your deduction drops by $100. By the time a single person hits $275,000, the benefit is totally gone.

The Fine Print: Who Gets the Break?

Not every hour worked over 40 counts. To qualify for no tax on overtime, the pay has to meet the definition set by the Fair Labor Standards Act (FLSA). This usually means hours worked over 40 in a single week for non-exempt employees.

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If you’re a salaried manager who is "exempt" from overtime rules, you’re mostly out of luck. You aren't legally required to get time-and-a-half, so you don't have "qualified overtime" to deduct. This has actually created a weird incentive where some workers are asking to be moved back to hourly pay just to catch the tax break.

What about Social Security and Medicare?

This is the part that trips people up. The law only touches federal income tax. You still have to pay your 7.65% for FICA (Social Security and Medicare). Your employer has to pay their share too. So, your "tax-free" overtime still has those familiar bites taken out before the money hits your bank account.

State taxes are another wild card. Unless your specific state decided to mirror the federal law, you might still owe state income tax on every dollar of that overtime. Some states jumped on the bandwagon fast, but others are still holding out, which makes filing your 2025 taxes—the ones you’re doing right now in early 2026—sorta a headache.

Why the Policy is Temporary

Nothing in Washington is forever, especially when it costs $90 billion over four years. The no tax on overtime provision is currently set to expire on December 31, 2028.

Why the expiration date? It was a budget move. By making it temporary, lawmakers could pass the bill without it looking like a multi-trillion dollar permanent hole in the deficit. Proponents, like those at the American Enterprise Institute, argue that exempting overtime is a "proxy for effort" and encourages people to work harder. Critics, like the Economic Policy Institute, worry it encourages burnout and gives employers an excuse to avoid giving actual raises.

There's also the "gaming" factor. Tax experts like those at the Tax Foundation warned that people would find ways to reclassify regular pay as overtime just to save money. We’re already seeing some of that in the construction and manufacturing sectors, where "flexible" scheduling is becoming the new norm.

How to Claim It This Tax Season

Since this law was retroactive to January 1, 2025, you can claim the deduction on the return you file this year (2026).

1. Check your W-2. For the 2025 tax year, the IRS gave employers some wiggle room. Your qualified overtime might be buried in Box 14 under a label like "OT PREMIUM."
2. Look for the "TT" code. Starting with the 2026 tax year (the stuff you're earning now), the IRS is moving toward a standard "TT" code in Box 12 for easier tracking.
3. Fill out Schedule 1A. This is the new form where you’ll calculate your deduction. You’ll need to list your MAGI and the total qualified overtime your employer reported.
4. Transfer to Form 1040. The final number goes on Line 13b of your main tax return.

The cool thing is you don't have to itemize. You can take the standard deduction and still grab this overtime break. It’s an "above-the-line" style benefit that reduces your taxable income directly.

Actionable Insights for Workers

If you're logging extra hours and want to make sure you're actually getting the most out of the no tax on overtime rules, you need to be proactive.

First, talk to your HR or payroll department. Ask them how they are calculating "qualified overtime compensation" for your W-2. If they’re just lumping everything into one "overtime" bucket, you might be leaving money on the table because the IRS allows for "reasonable estimation" methods for the 2025 transition year.

Second, keep your own records. Save your pay stubs. If your employer’s numbers look low, you’ll want that paper trail. Remember that only the 0.5x premium is deductible. If you earned $3,000 in total overtime pay at time-and-a-half, your deduction is likely $1,000 (which is the one-third representing the premium).

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Finally, adjust your withholdings if you haven't already. If you know you're going to have a $5,000 deduction at the end of the year, you might be overpaying the IRS every month. A quick update to your W-4 could put that cash in your pocket today instead of waiting for a refund next spring.

The "One Big Beautiful Bill" changed the math on hard work. It's not a total tax wipeout, but for a nurse or a line worker hitting the 50-hour mark every week, that $12,500 deduction can mean thousands of dollars staying in the family budget instead of going to the Treasury. Just make sure you're reading the fine print before you bank on it.