US guide

No Tax on Overtime: What It Means for Your Pay

The campaign promise to remove federal income tax from overtime pay became law in the One Big Beautiful Bill Act, signed in July 2025 as Public Law 119-21. The IRS now treats qualified overtime compensation as deductible for the 2025 through 2028 tax years. This guide walks through how the rule actually works, who qualifies, and what the saving looks like at a typical hourly income.

How overtime is currently taxed

Before the new deduction, overtime pay was taxed as ordinary income at the worker's marginal federal rate. Social Security and Medicare contributions (FICA) also applied, and state and local income tax still applied where relevant. Many hourly workers ended up in the 22% federal bracket once their overtime stacked on top of base pay.

A worker earning $60,000 in base pay plus $15,000 in overtime pay sits in the 22% federal marginal bracket on the overtime slice. Federal income tax on the $15,000 overtime portion comes to roughly $3,300, and FICA at 7.65% takes another $1,147. Combined federal tax on the overtime portion is about $4,447 before any state tax.

What changes under the new law

The One Big Beautiful Bill Act creates an above-the-line deduction for qualified overtime compensation. Federal income tax is removed from the deductible portion of overtime pay, but Social Security and Medicare contributions still apply. State and local income taxes are unaffected unless your state passes a matching exemption.

Here is the headline picture for a single filer earning $60,000 in base wages plus $15,000 in overtime, assuming the full overtime amount qualifies for the federal income tax exclusion.

The actual statute is narrower than the headline. Only the premium portion of time-and-a-half overtime required by the Fair Labor Standards Act qualifies, meaning the extra half above the regular hourly rate. Voluntary overtime that an employer pays at time-and-a-half but is not legally required does not count. The deduction is capped at $12,500 per year for single filers and $25,000 for joint filers, and it phases out for modified adjusted gross income above $150,000 single or $300,000 joint. Independent contractors and rail carrier employees are excluded.

Who benefits most

The deduction is aimed at hourly non-exempt workers who clock long weeks. Construction crews, factory operators, healthcare staff, warehouse and logistics workers, and retail employees on 50 plus hour weeks all see the biggest absolute saving. The deduction is above-the-line, so it works whether you itemize or take the standard deduction.

Higher-earning hourly workers benefit more per overtime dollar because of higher marginal rates, but the $12,500 single cap means the maximum federal income tax saving lands somewhere between $1,500 and $4,625 a year depending on bracket. Exempt salaried employees do not qualify because FLSA overtime does not apply to them.

Calculate your overtime tax saving

The fastest way to size up the impact is to model your total income two ways: with the qualified overtime portion taxed normally, and with it excluded from federal income tax. Our calculator runs the full US federal tax stack, including the standard deduction, the FICA wage base, and the bracket progression that determines your marginal rate on the overtime slice. Starting in tax year 2026 employers are required to report qualified overtime separately on the W-2, which makes year-end reconciliation simpler than it was in 2025.

This page covers a US federal rule. Overtime in the United Kingdom remains taxable as ordinary income through PAYE and National Insurance, and Canadian overtime is fully taxable through the federal and provincial brackets. Always verify current federal rules with the IRS before relying on a deduction.