A major federal tax change is making headlines in 2025, especially among hourly and tipped workers. With the signing of a new law, many are asking: Did no tax on overtime pass? When does the no tax on overtime start? This article breaks down what has changed, who it affects, and how it may impact your taxes starting next year.
Did No Tax on Overtime Pass?
Yes. The One Big Beautiful Bill Act (H.R. 1), signed into law on July 4, 2025, allows taxpayers to deduct qualifying overtime wages from their federal taxable income. While this does not remove all taxes on overtime pay, it does allow for a substantial deduction that will lower overall federal income tax liability for many workers.
This provision is intended to benefit employees who regularly work more than 40 hours per week or earn a significant portion of their income through tips. It is one of several temporary tax relief measures included in the legislation.
When Does No Tax on Overtime Start?
The deduction for overtime wages begins with the 2025 tax year. That means it applies to overtime earned starting January 1, 2025. Eligible workers will see the impact when they file their 2025 tax returns in 2026.
The provision is currently set to remain in effect through the 2028 tax year, unless it is extended or modified by future legislation.
How Much Can You Deduct?
The law allows the following annual deductions:
- Up to $12,500 in qualifying overtime wages for individual filers
- Up to $25,000 for married couples filing jointly
In addition, similar deductions are available for tipped income. These amounts are deducted directly from federal adjusted gross income, which may reduce overall tax owed even for those who do not itemize deductions.
However, this benefit begins to phase out for higher-income earners. The deduction is reduced for individuals with modified adjusted gross income (MAGI) above $150,000 and couples above $300,000.
What Qualifies as Overtime Pay?
To qualify for the deduction, overtime pay must meet the Fair Labor Standards Act (FLSA) definition of overtime. This typically means wages earned for hours worked in excess of 40 in a workweek at a rate of at least 1.5 times the employee’s regular rate of pay.
Employers will need to properly track and report qualifying overtime wages to help employees take full advantage of the deduction.
Are Other Taxes Still Withheld?
Yes. This deduction only applies to federal income tax. Workers will still have Social Security and Medicare (FICA) taxes withheld on all wages, including overtime. State and local income taxes may also still apply, depending on the jurisdiction.
How Will This Affect My Tax Return?
Starting with the 2025 tax year, eligible workers can claim the deduction for qualifying overtime wages when they file their federal tax return. It will appear as an above-the-line deduction, meaning it reduces gross income before calculating taxable income.
Employees should begin reviewing their pay stubs and keeping records of their overtime earnings now. Employers are expected to report qualifying overtime separately on Form W-2, but clear documentation will help ensure accuracy at tax time.
What Employers Need to Know
Employers will be responsible for updating payroll systems to track and report qualifying overtime and tipped wages. Additional IRS guidance on reporting requirements is expected later this year. Employers may also need to adjust year-end tax forms to comply with the new rules.
If you want to learn how the new law affects your specific situation, contact CPA Nerds. Our team can help you track eligible income, plan for your 2025 return, and stay ahead of further legislative updates.
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