No Tax on Overtime Pay?
April 4, 2026
Not quite. Prior to being enacted and signed into law last year on July 4, the One Big Beautiful Bill Act (“OBBBA”) was touted for its provisions calling for “No Tax on Tips” and “No Tax on Overtime,” but these tax benefits are not as sweeping as they sound. This article focuses on the parameters of the overtime pay tax deduction in particular.
Eligible employees are able to claim the tax deduction on their federal tax returns beginning this tax season for tax year 2025, and through tax year 2028. Overtime will still be taxed and taxes deducted from employees’ paychecks; workers will not see any change on the taxes deducted in their paychecks. The deduction is made at the time of tax filing, and there are several conditions that apply.
- What overtime qualifies for the deduction? Qualified overtime compensation is overtime paid to an employee that is:
- Required by federal law in section 7 of the Fair Labor Standards Act (“FLSA”) (i.e., 1.5 times pay for hours over 40 per week); and
- Exceeds the employee’s “regular rate” as determined by FLSA.
Qualified overtime compensation is NOT:
- California’s daily overtime for over 8 hours;
- On-call pay; or
- Overtime required by a collective bargaining agreement that is not required under FLSA, such as an 8-hour minimum guarantee. Hours not actually worked do not count toward the calculation of qualified overtime.
An eligible employee can take a deduction on their individual tax return of up to $12,500 (or $25,000 if married and filing jointly) in qualified overtime compensation received during the applicable tax year. The deduction is not available if you are married and filing separately and also phases out for those with a modified adjusted gross income (MAGI) that exceeds $150,000 for single filers or $300,000 for joint filers. Employees must also have a valid social security number to claim the deduction.
For the 2025 tax year, employers are not required to report overtime on employees’ W-2 forms. Some employers are sending employees a separate statement reporting their overtime pay for the year. If the employer does not provide either of these, employees will have to determine their qualified overtime amount themselves using earnings or pay statements, invoices, or other documentation using one of the “reasonable methods” prescribed by the IRS in Notice 2025-69: https://www.irs.gov/pub/irs-drop/n-25-69.pdf.
To claim the deduction on qualified overtime compensation, employees should use the new IRS form – Schedule 1-A (Form 1040) which can be found at: http://www.irs.gov/Form1040, and follow the instructions.
