When Does No Tax on Overtime Start? The 2025 Rule, Explained
If you've been wondering when no tax on overtime starts, the short answer is: it already has. The deduction took effect for tax year 2025 as part of the federal tax law signed in July 2025, and it runs through tax year 2028. But the name is misleading — overtime isn't tax-free. Here's exactly how it works.
When does no tax on overtime start?
The provision is part of the One Big Beautiful Bill Act, the federal tax law signed in July 2025 — sometimes just called the overtime tax bill or the big beautiful bill overtime rule. It applies starting with tax year 2025, which means workers first claimed it on the returns they filed in early 2026.
It's not permanent. The deduction is effective for tax years 2025 through 2028. Unless Congress extends it, overtime pay goes back to being fully taxed for federal income tax purposes starting in tax year 2029. If you're an hourly worker counting on this deduction, plan around that end date.
How does no tax on overtime work?
Despite the headline, this is not a blanket exemption. It's a federal income-tax deduction, and it only covers the overtime premium — the extra 'half' in time-and-a-half. Say you earn $20 per hour. Your overtime rate is $30. Of that $30, the $20 base portion is taxed like any other wage. Only the $10 premium per overtime hour qualifies for the deduction.
Run the numbers on a full year: if that $20-per-hour worker puts in 10 overtime hours a week for 50 weeks, they earn 500 overtime hours. The premium is $10 per hour, so $5,000 of overtime premium is deductible from federal taxable income. In the 12% bracket, that's roughly $600 in federal income tax savings — real money, but a long way from 'no tax on overtime.'
One more mechanical detail: the deduction is claimed on your tax return, not in your paycheck. Withholding is largely unchanged, so your weekly check won't suddenly get bigger. The benefit shows up when you file, typically as a larger refund or a smaller balance due.
Who qualifies, and what are the caps?
The deduction applies to overtime premium pay as defined under federal overtime rules — generally the time-and-a-half required by the FLSA for hours over 40 in a workweek. Salaried employees who are properly exempt from overtime don't earn an overtime premium, so they have nothing to deduct.
There are hard caps: $12,500 per year for single filers and $25,000 for joint filers. The deduction also phases out for higher earners, starting above $150,000 in modified adjusted gross income for single filers and $300,000 for joint filers. Most hourly workers fall well under those thresholds, but a high-earning household with a lot of overtime could see the benefit shrink or disappear.
Because the rules have details that can shift with IRS guidance, verify current-year rules with the IRS before you count on a specific number.
So is there tax on overtime? Yes — here's what still applies
Plenty of tax still hits your overtime check. FICA (Social Security and Medicare) applies to every dollar of overtime, premium included. The base-rate portion of every overtime hour is still subject to federal income tax. And most state income taxes still apply to all of it, unless your state passes its own matching rule.
So on that $30 overtime hour for a $20-per-hour worker: FICA is owed on the full $30, federal income tax is owed on $20 of it, and state income tax is likely owed on all $30. The federal deduction only removes the $10 premium from federal taxable income — and only up to the annual cap.
What employers need to do
Employers have a reporting job: the law requires them to report overtime premium amounts so employees can claim the deduction accurately. That means your payroll records need to cleanly separate regular wages, the base portion of overtime, and the premium portion of overtime — not just lump everything into 'gross pay.'
This is where accurate time tracking stops being optional. If your timesheets don't reliably capture which hours crossed the 40-hour line each workweek, you can't report premium amounts correctly. A time clock that flags overtime automatically, paired with payroll that itemizes the premium, keeps you out of trouble. Kloqk's free time clock tracks overtime hours per workweek so the premium math is already done when payroll runs.
Frequently asked questions
When did no tax on overtime start?
It took effect for tax year 2025. The law was signed in July 2025 and the deduction applies to tax years 2025 through 2028, claimed when you file your federal return.
Is overtime completely tax-free now?
No. Only the overtime premium — the extra half of time-and-a-half — is deductible from federal income tax, capped at $12,500 (single) or $25,000 (joint) per year. FICA still applies to all overtime, and most state income taxes still apply.
Will my paycheck get bigger because of no tax on overtime?
Probably not by much. Withholding is largely unchanged, so the benefit shows up when you file your tax return rather than in each paycheck.
Do high earners get the overtime deduction?
It phases out above $150,000 modified AGI for single filers and $300,000 for joint filers. Above those levels the deduction shrinks and can disappear entirely. Verify current-year rules with the IRS.
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