New no tax on overtime pay explained

Extra work hours in the week can mean extra pay. Now, it can also mean a new tax benefit you can claim on your return come tax time. Starting Jan. 1, 2025, the One Big Beautiful Bill Act introduces a federal income tax exemption on designated amounts of qualifying overtime pay.

The big news is you can deduct up to $12,500 in overtime pay for most filers (and up to $25,000 if you’re married filing jointly). While the details are still unfolding, this new law will impact millions of people and businesses who file a U.S. tax return.

The no tax on overtime starts with overtime earned on or after Jan. 1, 2025. Employers must be able to track and report overtime separately on your W-2 starting from that point. The current end date for the provision is Dec. 31, 2028, but congress may choose to extend it in the future.

Not everyone will qualify for the tax break, so it’s important to understand the details. You must be a W-2 employee. Independent contractors and gig workers are not eligible.

Those with higher modified adjusted gross incomes may only be able to claim a partial deduction as the benefit begins to phase out starting at $150,000 (single) or $300,000 (married filing jointly). The deduction is not available for people using the married filing separately status. Additionally, the taxpayer receiving the overtime must have a Social Security number valid for work. Your overtime must meet federal labor standards — typically time-and-a-half for hours worked beyond 40 hours per week.

Generally, overtime pay is taxable. In fact, tax on overtime pay is part of your total tax liability on wages, so it is subject to federal income tax, Social Security, and Medicare taxes — just like your regular pay. With the new tax on overtime bill changes, you can now get a deduction for a certain amount of your overtime pay.

The tax break applies only to qualifying overtime wages under specific income thresholds. In other words, amounts above the threshold mentioned above will still be taxed. Additionally, the exemption applies only to federal income tax. That means you’ll still pay Social Security and Medicare taxes on overtime earnings.

You’ll report your income as usual on Form 1040. The IRS will provide guidance on how to exclude qualifying overtime from your taxable income. We expect more details on that in the coming weeks.

There’s no special overtime tax rate. Your overtime pay is considered ordinary income and is factored into your total income (i.e., your income before adjustments such as IRA contributions or student loan interest). In other words, your normal tax bracket rates would apply to the overtime that’s included in your taxable income.

What documentation is needed?

Your W-2 is the key document for filing your taxes. However, if your employer provides a pay stub breakdown or year-end summary showing overtime separately, keep it for your records. You could also receive Form 1099, or other specified statement to report your overtime pay

Take note: It’s also a smart idea to keep a record of your overtime yourself. And if you spot inaccuracies on your pay stub, let your employer know right away.

While tax changes can be stressful, you don’t have to go it alone. Trust the expertise of H&R Block to help make sense of your taxes.

— H&R Block