If you’ve been scrolling through the news lately, you probably saw something about "No Tax on Overtime" becoming a real thing. It sounds almost too good to be true—like one of those campaign promises that usually vanishes into thin air once the ink on the ballot dries. But it actually happened. The One Big Beautiful Bill Act (OBBBA) was signed into law on July 4, 2025, and it officially changed the game for anyone grinding through extra shifts.
So, let’s get straight to the point. When does the new tax on overtime start?
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Honestly, it has already started. Even though the bill was signed in the middle of last year, the law was made retroactive to January 1, 2025. This means any qualified overtime you worked since the beginning of last year counts. If you’re getting ready to file your taxes right now in early 2026, you’re looking at the first time you can actually claim this deduction.
But don't expect it to just automatically appear on your paycheck as "tax-free" cash. That's the part that catches people off guard.
The Start Date and Why Your Paycheck Still Looks the Same
Technically, the "no tax" part is an above-the-line deduction. It’s not a total wipeout of taxes at the source. Most employers throughout 2025 didn't have their payroll systems updated in time to stop withholding federal taxes on your overtime hours. They were basically flying blind while waiting for the IRS to tell them how to report it.
Because of that, you likely still paid federal income tax on every overtime hour you worked last year.
You’ll get that money back now. When you file your 2025 tax return (the one due by April 15, 2026), you’ll use the new Schedule 1-A to claim the deduction. It’s basically a refund play. You paid the tax upfront, and now you’re asking for it back because the law says those hours shouldn't have been taxed the way they were.
Moving into January 2026, things are getting a bit more organized. The IRS has mandated that for the 2026 tax year, employers must start tracking this stuff more accurately. You might even see a new code on your W-2—drafts showed a code "TT"—specifically for qualified overtime.
The $12,500 Cap and the "Half" Rule
You can't just work 80 hours a week and expect it all to be tax-free. There are hard limits.
- Single filers: You can deduct up to $12,500 in qualified overtime pay.
- Married filing jointly: The cap jumps to $25,000.
Here is where it gets kind of technical but super important. The deduction only applies to the "overtime premium." Think about it like this: if you normally make $20 an hour, your "time-and-a-half" rate is $30. The first $20 of that overtime hour is still taxed normally as regular income. Only the extra $10 (the premium) is what you get to deduct.
If you’re lucky enough to get double time or triple time because of a union contract or holiday pay, the IRS is still only letting you deduct the 0.5x premium required by the Fair Labor Standards Act (FLSA). Basically, they're only giving you a break on what the federal law forces your boss to pay you. Anything extra your boss gives you out of the goodness of their heart? Uncle Sam still wants his full cut of that.
Who Actually Gets the Break?
Not every worker is invited to this party. You have to be a non-exempt W-2 employee.
If you’re a "white-collar" salaried employee who doesn't get overtime pay, this doesn't help you. If you’re a 1099 contractor or a gig worker, it's a bit of a gray area right now. The IRS is still hashing out the final rules for contractors, but for now, it's mostly aimed at hourly workers in manufacturing, healthcare, retail—the people punching a clock.
There's also an income limit. If you're a high-earner, the benefit starts to disappear.
- Phase-out starts: $150,000 for singles / $300,000 for married couples.
- How it works: For every $1,000 you earn over that limit, your deduction limit drops by $100.
- Total cutoff: Once you hit $275,000 (single) or $550,000 (joint), the deduction is gone. You're back to paying full price for your overtime.
This Isn't a Permanent Change
We need to talk about the "sunset" clause. This isn't a permanent fixture of the tax code like the standard deduction. As of right now, the "No Tax on Overtime" provision is only scheduled to run through December 31, 2028.
Could Congress extend it? Sure. But for now, you’ve only got a four-year window (2025, 2026, 2027, and 2028) to take advantage of it. It’s basically a trial run to see if it actually encourages people to work more or if it just creates a giant headache for the IRS.
And don't forget: this only applies to federal income tax. You are still paying Social Security and Medicare taxes (payroll taxes) on every single cent. Your state might also still want its piece. Unless you live in a state that automatically follows federal tax changes, you’ll probably still owe state income tax on that overtime.
What You Need to Do Right Now
If you’re sitting there with your 2025 W-2 and you don't see a separate line for overtime, don't panic. For the 2025 transition year, the IRS gave employers some wiggle room. They might have put the info in Box 14, or they might have sent you a separate year-end statement.
If they didn't do either, you might have to go back through your old pay stubs and do the math yourself. It’s a pain, but if you worked a lot of extra hours last year, it could mean an extra couple thousand dollars in your refund.
Next Steps for Your 2026 Taxes:
- Audit your pay stubs: Look for the specific "overtime premium" amounts. Remember, it's just the extra 0.5x portion.
- Check for Schedule 1-A: When you log into TurboTax or go to your CPA, ask specifically about this form. It's brand new for this season.
- Talk to Payroll: Ask your HR department if they are using the new Box 12 code for 2026. This will make your life much easier next year.
- Watch the income limits: If you’re close to that $150k mark, your deduction might be smaller than you expect.
The "No Tax on Overtime" era is officially here, but it's more of a "Some Tax Back Later" situation for most of us. Keep your records tight, because the IRS is definitely going to be looking closely at these new deductions this year.