No Tax on Overtime: What You Need to Know About the New Overtime Deduction

Starting in 2025, the One Big Beautiful Bill Act (OBBBA) introduces a major tax break for workers who earn overtime. For tax years 2025 through 2028, individuals can deduct up to $12,500 of qualified overtime pay from their taxable income each year—or up to $25,000 if filing jointly with a spouse. This deduction is available whether you itemize or take the standard deduction.

 

What counts as “qualified overtime”? It’s the extra pay you receive for working more than 40 hours a week, as required by the Fair Labor Standards Act (FLSA). Specifically, it’s the “half” portion of your “time-and-a-half” overtime pay. To qualify, your overtime must be reported on a Form W-2 (for employees), Form 1099 (for independent contractors), or another official statement.

There are a few important rules:

• The deduction begins to phase out if your modified adjusted gross income is over $150,000 ($300,000 for joint filers).
• You must include your Social Security Number on your tax return to claim the deduction.
• If you’re married, you must file a joint return.

Employers and payors are required to report the total amount of qualified overtime paid to you each year. For 2025, the IRS is offering transition relief, meaning employers and payors won’t be penalized if they can’t yet provide all the new details on your tax forms, as long as they report the total pay.  Employers are still encouraged to aid employees in obtaining overtime information for 2025 tax return purposes, either through additional written statements or other secure means.

 

This new deduction is a big win for workers who put in extra hours. Be sure to keep your pay stubs!