“No Tax on Overtime” and What it Means for Overtime Workers

The recently enacted "No Tax on Overtime" provision, part of the broader legislative package known as the "One Big Beautiful Bill Act," offers significant tax relief to millions of American workers. Signed into law by President Donald Trump, this provision aims explicitly to reduce the tax burden on overtime earnings. Here's what overtime workers need to understand about this beneficial change.

Key Takeaways:

• Workers can deduct up to $12,500 in overtime pay from taxable income ($25,000 for joint filers).

• Applies to overtime compensation required under the Fair Labor Standards Act (FLSA).

• The deduction phases out at incomes above $150,000 ($300,000 for joint filers).

• Effective temporarily for tax years 2025 through 2028.

• Overtime pay must be reported separately on IRS Form W-2, Wage and Tax Statement, or IRS Form 1099-MISC, Miscellaneous Information.

Understanding the “No Tax on Overtime” Provision

Under this legislation, qualifying overtime workers can now deduct up to $12,500 of their overtime earnings from their taxable income ($25,000 for joint filers). The deduction specifically applies to overtime wages paid according to Section 7 of the FLSA, requiring these earnings to be explicitly documented on your W-2 or 1099.

This deduction is "above-the-line," meaning workers can take advantage whether they itemize deductions or claim the standard deduction. It's important to note, however, that the benefit phases out for workers with Modified Adjusted Gross Income (MAGI) above $150,000 ($300,000 for joint filers). 

Who Stands to Benefit Most?

This provision directly aids individuals who frequently earn overtime, including:

• Healthcare professionals.

• Manufacturing and warehouse workers.

• First responders (firefighters, police officers, EMTs).

• Construction and trade workers.

• Employees in the retail and service industries who regularly accrue overtime hours.

This substantial tax relief ensures more of your hard-earned overtime pay stays in your pocket. Preview how much you can save by using the Tax-Free Tips & Overtime Calculator (in the middle of the page) on the White House’s official website.

Implications for Employers

Employers must ensure accurate reporting of overtime compensation on tax forms. Clearly distinguishing overtime pay on W-2s or 1099s is essential for employees to qualify for this deduction. Employers benefit indirectly as this measure may help improve employee satisfaction and retention, especially in industries with frequent overtime demands.

Maximizing Your Overtime Earnings

Navigating these beneficial yet complex tax changes can feel overwhelming. Partnering with the tax professionals at 1-800Accountant, America’s leading virtual accounting firm, can simplify the process. We offer affordable, tax-deductible small business tax services and personalized business tax advisory tailored to your unique financial situation.

Our CPAs, EAs, and tax experts ensure you:

• Properly document and maximize your deductions

• Remain compliant with new tax regulations

• Receive expert guidance on optimizing your overall tax strategy

Recommended Next Steps

• Consult with a tax expert to review your financial situation and determine your eligibility.

• Verify Your Documentation: Ensure that your overtime compensation is reported separately on your tax forms.

• Stay Informed: Keep up with legislative changes by regularly checking authoritative sources, such as Congress.gov.

Final Thoughts

The "No Tax on Overtime" provision is a significant win for American workers, providing meaningful tax savings on overtime earnings. To navigate these benefits effectively and confidently, consider partnering with the financial experts at 1-800Accountant.

Schedule your free 30-minute consultation today and ensure you're maximizing your overtime earnings.