No Tax on Overtime: Federal Tax Deduction on Qualified Overtime
The “No Tax on Overtime” deduction was introduced in HR1 (One Big Beautiful Bill) in 2025. It allows non-exempt workers who work more than 40 hours in a week to reduce their year-end federal income tax liability (up to $12,500 for single filers or $25,000 for joint filers) when filing their taxes for tax years 2025–2028.
Continue Withholding Income Tax
Employers are still required to withhold and remit federal income tax on all employee wages, including overtime. Updated versions of Forms W-2 and 1099-NEC will include a new line for reporting qualifying overtime or tip income, which workers will use when claiming this deduction.
Summary of the Overtime Deduction
- Above-the-line federal income tax deduction
- Available to non-exempt, overtime-eligible employees
- Employers must continue withholding payroll tax on all overtime pay
- Only FLSA-defined overtime qualifies
- Employers must track and report eligible overtime premium pay separately on year-end forms
- Deduction capped at $12,500 per individual ($25,000 for joint filers)
- Phase-out begins at $150,000 AGI ($300,000 for joint filers)
- Effective for tax years 2025–2028
What Tax Is Deductible?
- Deduction applies only to Federal Income Tax (FIT) withheld from overtime premium compensation (0.5 × regular rate).
- Does not apply to regular hourly wages, Social Security, Medicare, or state taxes.
What Qualifies as “Overtime”?
- Only hours worked over 40 in a workweek, as defined by the Fair Labor Standards Act (FLSA).
- Overtime defined by state or local laws (such as daily overtime or consecutive-day rules) is not eligible.
- Employers must report eligible overtime separately on each employee’s Form W-2.
Who Qualifies for the Deduction?
- Hourly, non-exempt workers under the FLSA.
- Can be claimed even if the worker takes the standard deduction.
- Deduction phases out: reduced by $100 for every $1,000 of AGI over the income thresholds.
- Worker must have a valid Social Security number.
What Employers Need to Do
- Track and report FLSA overtime separately from other types of overtime.
- Report all qualified FLSA overtime to the IRS, including overtime earned retroactive to January 1, 2025.
- For 2025, employers may use a “reasonable method” (to be defined by the Treasury Secretary) to approximate eligible overtime.
- Use the designated “Overtime” pay item in Beyond to ensure correct tracking—do not create custom pay items.
Looking Ahead
Beyond will provide updates as the Treasury Secretary releases further guidance on how to approximate qualified overtime for 2025, as well as instructions for accurate reporting in 2026–2028.
No Tax on Tips
HR1 also introduced a similar deduction for tipped workers. Employees who earn tips may reduce their year-end federal income tax liability by up to $25,000 per individual for tax years 2025–2028.
Need Help?
If you still have any questions, please don’t hesitate to reach out. Our team will be happy to provide answers and assist you in any way we can.