Overtime Pay Deduction: What Workers Need to Know for Tax Season

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Tax cuts are back in the news, and one of the most closely watched provisions is the overtime pay deduction in the 2025 tax bill, known by some as the "big beautiful bill."

President Donald Trump has argued that eliminating the tax on overtime pay would incentivize work, benefit hardworking Americans, and make it easier for companies to attract employees.

The idea, which gained traction alongside the “no tax on tips” pledge during the most recent presidential campaign, is (with several limits) now part of major GOP tax legislation enacted July 4, 2025.

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Now, many workers' questions center on what the changes are and what they mean for their paychecks going forward.

Here’s more to know.

How overtime pay is taxed in 2025

As of July 4, 2025, the Trump/GOP tax bill allows workers to deduct up to $12,500 of the premium portion of certain overtime pay ($25,000 for joint filers) from their federal taxable income for tax years 2025 through 2028.

It's important to note that the new tax bill doesn't fully exempt all overtime pay from federal income tax. Payroll and state/local taxes still apply.

Previously, overtime pay was taxed like regular wages, subject to federal and state income taxes and Social Security and Medicare withholding.

Now, under the new tax law, while payroll and state/local taxes still apply, eligible workers won't owe federal tax on the deductible portion of their eligible overtime pay each year during the three years.

Key Points:

The Fair Labor Standards Act (FLSA) mandates that eligible workers receive at least 1.5 times their standard pay rate for hours worked beyond the typical 40-hour workweek. (The "premium portion" is the half, 0.5).
Overtime pay is normally subject to federal income tax, and Social Security and Medicare taxes.
Now, under the so-called "big beautiful bill," eligible individuals can deduct up to $12,500 of premium overtime earnings from their taxable income each year from the 2025 through 2028 tax years.
You won't have to itemize deductions to claim this tax break, and the deduction phases out for higher earners, starting at $150,000 in income for singles ($300,000 for joint filers).

*Remember: Under the 2025 tax law, only the deductible portion of federal income tax on overtime pay is eliminated for 2025 through 2028. Payroll taxes and state/local income taxes will still apply.

Also, since this tax break is different than a tax credit or total exemption, your overall tax savings, if any, will likely depend on your marginal tax rate.

Is overtime tax-free now?

The "no tax on overtime" proposal is part of a series of tax cut promises Trump made during his presidential campaign. As Kiplinger has reported, he previously suggested eliminating taxes on tips and ending the tax on Social Security benefits.

In recent years, Gallup polling has revealed that a majority of workers regularly clock more than 40 hours a week.

Data show that nearly 80% of voters support some form of overtime pay protection for all workers. (That support was reportedly strong across political party lines.)

So, some lawmakers saw the proposals, criticized by many economists and policymakers, as ways to appeal to so-called "working-class" voters.

But keep in mind that Trump's new tax bill doesn't make all overtime pay fully exempt from federal income tax, and while the idea of tax-free overtime may sound appealing, critics worry.

There's the potentially significant loss of federal tax revenue (on the low end, depending on what income is exempted, an estimated $145 billion over ten years, according to the Tax Foundation)
Plus, the possibility of employers relying more on overtime instead of hiring additional workers

Similar concerns have been raised about "no-tax-on-tips." (The Tax Foundation estimates a cost, on the low side, of $107 billion over ten years).

When does no tax on overtime start?

With the Trump tax bill now signed into law, the federal income tax deduction for overtime pay applies beginning with the 2025 tax year and continues through 2028.

Supporters of the tax break say eligible workers will see the change reflected in their 2025 tax return, filed now, in 2026.

However, keep in mind that, as mentioned above, the deduction is limited in terms of time, amount, and income.

How to claim the overtime pay deduction

Eligible workers can claim the overtime pay deduction on the new Schedule 1‑A (Additional Deductions) of Form 1040.

You report your qualified overtime earnings there — up to $12,500 per individual ($25,000 for joint filers) — and the total deduction is then carried over to your Form 1040.

As mentioned, you don't have to itemize deductions to claim this tax break but the deduction phases out for higher-income filers (starting at $150,000 for single, $300,000 for joint).

Other new overtime rules?

Questions about how Trump is dealing with overtime pay come as many in the U.S. grapple with the varied impacts of inflation, including concern that wages and income are not keeping pace.

The Biden administration had enacted a rule that would have raised the minimum salary requirement for overtime pay eligibility. The move was designed to boost wages for workers with lower incomes.

The new Department of Labor rule was scheduled to take effect in two stages over the next year.
The FLSA salary threshold first increased in July to $43,888 annually ($844 per week), up from the previous $35,568 ($684 per week).
Future threshold increases would occur in later years, beginning as soon as 2025. For instance, on January 1, 2025, the threshold would increase to $58,656 a year ($1,128 per week).
That change was expected to extend overtime pay protection to millions of additional workers who weren’t previously eligible.

With some exceptions, most employers would be required to follow the overtime rules, at least regarding the July 1, 2024 changes.

Note: The Trump administration hasn't announced a new rule for overtime eligibility, so employers will likely follow the 2019 rules.

Texas overtime ruling: What it means for you

What happened in Texas? Texas sued the Department of Labor over the Biden overtime pay eligibility rule, which, as mentioned, would have raised the minimum salary threshold for overtime exemption to $58,656 as of January 1, 2025.

Texas argued that the federal government (DOL) overstepped its authority by focusing on salary rather than job duties. A Texas federal court struck down the new DOL overtime rule.

As a result, the new overtime rule's implementation is blocked nationwide and the salary thresholds have reverted to the 2019 levels. ($684 per week ($35,568 a year) for most employees and $107,432 for highly compensated employees.)

It's expected that most employers will follow 2019 salary thresholds for overtime eligibility, pending further federal guidance.

Overtime tax in 2025: Bottom line

The Trump/GOP tax bill, signed into law on July 4, 2025, now provides an above-the-line deduction for overtime pay.

This isn't a full tax exemption, but advocates see it as a way to provide some tax relief to eligible workers who put in more than 40 hours per week.

The deduction of up to $12,500 per individual phases out at higher incomes and will only be available for three years.

At the same time, as reported by Kiplinger, several states are also considering proposals to end state taxes on tips.

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Kelley R. Taylor is the senior tax editor at Kiplinger.com, where she breaks down federal and state tax rules and news to help readers navigate their finances with confidence. A corporate attorney and business journalist with more than 20 years of experience, Kelley has helped taxpayers make sense of shifting U.S. tax law and policy from the Affordable Care Act (ACA) and the Tax Cuts and Jobs Act (TCJA), to SECURE 2.0, the Inflation Reduction Act, and most recently, the 2025 “Big, Beautiful Bill.” She has covered issues ranging from partnerships, carried interest, compensation and benefits, and tax‑exempt organizations to RMDs, capital gains taxes, and energy tax credits. Her award‑winning work has been featured in numerous national and specialty publications.