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Explainer 8 min read · Updated May 2026

No Tax on Overtime, Explained

The One Big Beautiful Bill Act became law in July 2025, creating a federal deduction for overtime wages. Here is what it means, who qualifies, and how much extra take-home pay you can expect.

Key Fact

No tax on overtime is now law. The One Big Beautiful Bill Act was signed in July 2025. The deduction applies to tax year 2025 and beyond, meaning qualifying workers can deduct overtime wages from their federal taxable income.

What Is the No-Tax-on-Overtime Deduction?

The no-tax-on-overtime deduction is a provision in the One Big Beautiful Bill Act that allows eligible employees to exclude overtime compensation from their federal taxable income. In practical terms: if you earn $400 in overtime pay in a given week, you do not owe federal income tax on that $400.

This is structured as a deduction, not an exclusion at the withholding stage. For tax year 2025, workers will claim the deduction when they file their federal tax return. Future IRS guidance may update withholding tables so employers can reduce withholding on overtime pay during the year.

The deduction covers overtime premiums paid under the Fair Labor Standards Act (FLSA) — meaning the amount above the regular straight-time rate for hours over 40 in a workweek.

Who Qualifies for the Deduction?

The deduction is intended for non-exempt hourly and salaried workers who receive overtime pay under the FLSA. Key eligibility factors:

  • You must earn overtime pay — workers classified as exempt (certain managers, professionals, and administrative employees above the salary threshold) do not typically receive FLSA overtime and do not qualify.
  • Income caps may apply — the legislation includes income limits to target the benefit toward middle-income workers. Check the latest IRS guidance for the exact thresholds.
  • The deduction is for federal income tax only — it does not affect Social Security and Medicare (FICA) taxes, which are still owed on overtime earnings.
  • State taxes are separate — some states may conform to the federal deduction; others may not. Check your state's rules.

How Much Will You Save?

Your savings depend on your federal income tax bracket and how much overtime you work. For a worker in the 22% bracket who earns $5,000 in overtime pay over the year, the deduction is worth approximately $1,100 in reduced federal taxes. For someone in the 12% bracket earning $3,000 in overtime, savings are roughly $360.

Use our Overtime Pay Calculator to toggle the "No Tax on Overtime" comparison and see your personalized estimate.

Annual Overtime Pay12% Bracket Savings22% Bracket Savings
$1,000$120$220
$3,000$360$660
$5,000$600$1,100
$10,000$1,200$2,200

Frequently Asked Questions

Did no tax on overtime pass? +
Yes. The One Big Beautiful Bill Act was signed into law in July 2025. The no-tax-on-overtime deduction is effective for tax year 2025 and later years.
Does this mean my employer won't withhold tax on overtime? +
For 2025, withholding may not change immediately — many workers will claim the deduction when they file their tax return. The IRS is expected to update withholding guidance so that future paycheck withholding reflects the deduction.
Does the deduction apply to FICA taxes? +
No. Social Security (6.2%) and Medicare (1.45%) taxes still apply to all earned income, including overtime pay. The deduction only reduces federal income tax.
What if my state has its own income tax? +
State conformity varies. Some states automatically conform to federal tax changes; others do not. Check your state's revenue department or a tax professional for guidance on whether the deduction applies to your state tax return.

Calculate Your Overtime Savings

Use our free calculator to see your regular pay, overtime pay, and estimated tax savings side by side.

Open Overtime Calculator