No Tax on Overtime: What the New Law Means for Workers

If you put in extra hours on the job, there’s some good news at tax time.

Under President Trump’s One Big Beautiful Bill Act, signed into law in July 2025, workers who earn overtime pay will be eligible for a special federal tax deduction—often referred to as the “No Tax on Overtime” provision. The change applies to tax years 2025 through 2028 and is designed to put more money back into the pockets of employees who rely on overtime to make ends meet.

Here’s how it works, in plain terms.

Under federal labor law, most non-exempt hourly workers, and some lower-paid salaried employees, earn time-and-a-half for hours worked over 40 in a week. That means overtime pay consists of two parts: your regular hourly wage plus a 50 percent premium.

The new tax break applies only to the premium portion, not the full overtime paycheck.

For example, if you normally earn $20 an hour and work 10 hours of overtime in a week, your overtime rate is $30 an hour. That totals $300 in overtime pay. Under the new rule, only the extra $10 per hour—the premium—is eligible for the deduction. In this case, that’s $100 that will not be subject to federal income tax.

Workers can deduct up to $12,500 per year in overtime premiums, or $25,000 for married couples filing jointly. The benefit begins to phase out for individuals earning more than $150,000 a year, or $300,000 for joint filers.

It’s important to note what doesn’t change. You will still pay Social Security and Medicare taxes, and any applicable state or local taxes, on your overtime pay. Employers will continue withholding taxes as usual during the year. The benefit comes when you file your tax return and claim the deduction.

The provision is expected to help millions of blue-collar and hourly workers, including factory employees, nurses, truck drivers, construction workers, and others whose income often depends on overtime. Estimates suggest eligible workers who regularly work overtime could save $1,400 to $2,000 a year on their federal income taxes.

The deduction is temporary, set to expire at the end of 2028 unless extended by Congress. It is also retroactive to January 2025, meaning workers can claim it when they file their 2025 tax returns in 2026.

Workers are encouraged to keep detailed pay stubs or earnings records to track eligible overtime premiums. For personalized advice, consulting a tax professional or reviewing guidance at IRS.gov is recommended.

For many workers, the message is simple: if you’re putting in the extra hours, this new rule could help ensure more of that hard-earned overtime pay stays in your pocket.