When Does No Tax on Overtime Start? 2025 to 2028

When does no tax on overtime start? The One Big Beautiful Bill Act, signed July 4, 2025, put a federal income tax deduction on overtime premiums into effect starting with tax year 2025. It runs through December 31, 2028. Workers who earned qualifying overtime in 2025 claimed the deduction on the returns they filed in early 2026.

When Does No Tax on Overtime Start, and When Does It End?

The provision is Section 70202 of the One Big Beautiful Bill Act (OBBB Act), signed into law on July 4, 2025. It covers four consecutive tax years: 2025, 2026, 2027, and 2028. Unless Congress extends it, overtime premiums return to full federal income tax exposure starting January 1, 2029.

Timeline details matter here. The deduction applies to overtime worked any time during a covered tax year, including hours worked before the bill passed in July 2025. A worker who logged overtime in January 2025 claimed those premiums on the 2025 return just like someone who worked extra hours in December. No retroactive amendment or special election is needed. It's built into the normal annual filing process.

Many state-specific searches land on this article: when does no tax on overtime start in Texas, when does it start in Ohio, in Florida, in California, and across nearly every state. The federal deduction is uniform across all 50 states. What varies is whether your state tax return conforms to the federal deduction, and most states do not. That distinction is covered in the state taxes section below.

Those asking whether no tax on overtime started yet have a clear answer: it did, with tax year 2025. Workers across Ohio, Michigan, Florida, Indiana, New York, Illinois, North Carolina, Missouri, South Carolina, Georgia, Oklahoma, Pennsylvania, Alabama, Arizona, Virginia, Kentucky, Wisconsin, Louisiana, New Jersey, and Nevada all access the same federal deduction on their federal return. The no tax on overtime start date is uniform. The state income tax treatment is not.

What the Deduction Actually Covers

This is a federal income tax deduction, not a blanket exemption from all taxes. The deduction applies only to the premium portion of overtime pay, which is the premium half of time-and-a-half. It doesn't cover the base portion of overtime hours, it doesn't affect FICA, and it doesn't change paycheck withholding. Here's what that means in practice.

Take a worker earning $20 per hour. The FLSA overtime rate is $30 per hour (1.5 times the base). Of that $30, the $10 premium qualifies for the deduction. The $20 base portion is taxed like any other wages. For 10 overtime hours in a week, the worker earns $300 in overtime gross pay. The deductible premium for that week is $100. Over 50 weeks, $5,000 in deductible premium comes off federal taxable income on $15,000 of total overtime gross earnings. The phrase no tax on overtime overstates what the law does.

• Not a credit. A credit reduces tax owed dollar-for-dollar. A deduction reduces the income the tax is calculated on. The value depends on the worker's marginal rate: roughly 12 to 22 cents per deductible dollar for most overtime workers.
• Not an exemption from FICA. Social Security and Medicare taxes still apply to every dollar of overtime, including the premium. The OBBB Act made zero changes to payroll taxes.
• Not automatic on each paycheck. Withholding is not adjusted. The benefit is claimed on the annual federal return, not in each pay period.
• Not available for non-FLSA premiums. Voluntary or contractual overtime premiums that federal law doesn't require don't qualify. The deduction keys off FLSA section 7, not off any company policy that pays extra for long days or weekends.

Who Qualifies for the No Tax on Overtime Deduction?

Eligibility hinges on three things: employment classification, Social Security number status, and filing status. According to the IRS (IRS Newsroom, Feb 7, 2026), the deduction is available to FLSA non-exempt employees who have a valid Social Security number issued for employment purposes and who file as Single, Head of Household, or Married Filing Jointly. Married Filing Separately filers are not eligible for any deduction amount.

FLSA non-exempt means the worker is legally entitled to overtime pay (at least 1.5 times their regular rate) for hours worked past 40 in a workweek under federal law. Hourly workers are typically non-exempt. Exempt salaried workers, such as managers who pass the FLSA duties tests, earn no overtime premium and have nothing to deduct. The line isn't salary vs. hourly; it's whether the person legally earns an FLSA overtime premium for that pay period.

A salaried worker can qualify. A bookkeeper paid a fixed salary but classified as salaried non-exempt still earns overtime premiums when working more than 40 hours in a workweek. Those premiums are deductible. What you can't deduct are premiums that don't exist. An exempt manager working 55-hour weeks has no qualifying overtime under federal law, regardless of how long those weeks run.

One nuance for multi-employer situations: each employer applies the 40-hour threshold independently. An employee working 30 hours per week at two separate jobs earns no FLSA overtime at either employer, even though the combined total reaches 60 hours. The deduction follows the FLSA premium at each individual employer, not the total hours across all jobs.

What Are the Income Limits and Phase-Out Thresholds?

The deduction phases out at higher income levels. Per IRS guidance published February 7, 2026, the phase-out reduces the maximum deduction by $100 for every $1,000 of modified adjusted gross income (MAGI) above the applicable threshold. The maximum deduction is $12,500 for single filers and $25,000 for married filing jointly.

The phase-out math is straightforward. A single filer with $175,000 MAGI is $25,000 above the $150,000 threshold. At $100 reduction per $1,000 over, the maximum deduction drops by $2,500, leaving a $10,000 limit for that filer. At $275,000 MAGI, the deduction is completely eliminated. The joint filer phase-out works the same way, starting at $300,000 and reaching zero at $550,000.

For most hourly workers earning overtime, the phase-out is irrelevant. The single-filer threshold of $150,000 MAGI sits well above what most non-exempt hourly workers earn. The threshold matters mainly in households where one spouse earns a high salary and the other works heavy overtime, potentially pushing combined MAGI toward the $300,000 joint phase-out. Those households should run the actual numbers before counting on the full joint deduction at filing time.

The deduction is available whether or not the employee itemizes. Workers don't have to give up the standard deduction to claim it. That matters because most hourly workers take the standard deduction and would get nothing from an itemize-only benefit. The overtime premium deduction stacks on top of the standard deduction.

A Worked Example: $20 per Hour, 10 Overtime Hours per Week

Let's run the full math for a single filer earning $20 per hour who works 10 overtime hours per week, 50 weeks per year, with MAGI well below $150,000.

Each overtime hour pays $30 (1.5 times $20). The deductible premium per hour is $10, which is the portion above the base rate. Over 10 hours per week for 50 weeks, that's 500 overtime hours in the year. Gross overtime pay: $15,000. Deductible premium: $5,000. Federal taxable income drops by $5,000 at filing time.

Tax savings depend on the worker's bracket. In the 12% bracket, $5,000 times 0.12 equals $600 in federal income tax saved. In the 22% bracket, the savings come to $1,100. Neither number is trivial. Neither makes overtime tax-free.

What doesn't change: FICA withheld on the $15,000 of overtime gross pay (roughly $1,148 for the worker's share of Social Security and Medicare at 7.65%), federal income tax on the $10,000 base portion of those overtime hours, and state income tax on the full $15,000 in most states. The deduction is worth $600 to $1,100 on a $15,000 overtime check. That gap is worth understanding before the scheduling conversation happens, because employees sometimes expect a much larger benefit than the math produces.

Use the overtime calculator to compute the FLSA premium for any workweek. Knowing the premium total before year-end gives both workers and employers a chance to verify what should appear in Box 12 on the W-2, rather than discovering a mismatch during tax filing season.

Does No Tax on Overtime Apply in Your State?

The federal deduction applies nationwide, but state income taxes are a separate matter. Most states had not passed conforming legislation as of mid-2026, which means workers in California, New York, Texas, Florida, Illinois, Pennsylvania, Ohio, Georgia, North Carolina, and most other states still owe full state income tax on their overtime pay, including the premium portion.

This catches people off guard. Searching for no tax on overtime California when does it start, or no tax on overtime NY start date, reflects an expectation that the federal change carries through automatically to the state return. It doesn't. States write their own income tax rules. A federal deduction doesn't flow to a state return unless the state legislature passes its own conforming provision separately.

A handful of states with no income tax, such as Texas, Nevada, and Florida, have no state income tax exposure on overtime regardless of federal law. For workers in those states, the federal deduction covers the meaningful tax benefit without any state-level confusion. Workers in high-tax states without conforming law pay full state income tax on the whole overtime check, premium included, even after the federal return shows a deduction.

California has an additional complexity worth flagging for employers. California daily overtime rules require premiums after 8 hours in a workday, which federal law doesn't require. A premium that only California law generates isn't a qualified overtime premium under the federal definition, which keys off FLSA section 7. Payroll in California must track FLSA-required premiums and California daily premiums separately, because only the FLSA-required amount goes in Box 12, Code TT on the W-2.

How Does This Affect Withholding and Each Paycheck?

Withholding does not change automatically. The deduction is claimed on the annual federal tax return, not applied to each paycheck as overtime hours accrue. A worker pulling 15 overtime hours in a March 2026 pay period sees the same federal withholding on that overtime as before the law existed. The benefit shows up at filing time as a larger refund or a smaller balance due.

Workers who want to reduce withholding during the year can submit an updated 2026 Form W-4 to their employer. The deductions worksheet on the W-4 lets employees account for known deductions, including the overtime premium. That's the worker's decision to make. Don't adjust withholding on their behalf without a new W-4 in hand.

FICA withholding is not adjustable here at all. Social Security and Medicare apply to every dollar of overtime pay, and the OBBB Act changed nothing about payroll taxes. An employer that stops withholding FICA on overtime premiums is creating a separate compliance problem, not a benefit for the workforce.

What Employers Must Do: W-2 Reporting and Payroll Changes

The employer's core obligation is accurate W-2 reporting of qualified overtime premiums. According to Warren Averett's analysis of the OBBB Act's payroll reporting requirements (Warren Averett, Jan 2026), tax year 2025 reporting was voluntary, with IRS penalty relief allowing employees to use any reasonable method. Starting with tax year 2026 it is mandatory: qualified overtime premiums must appear in Box 12, Code TT on the W-2.

This requires your payroll system to distinguish three categories of pay it may have combined before:

1. Regular wages (straight-time hours, no premium component).
2. FLSA-required overtime premium (the half above base rate for hours past 40 in the federal workweek). This is the Box 12, Code TT amount.
3. Non-FLSA overtime (contractual extras, California daily premiums, voluntary double-time policies). These don't go in Box 12, Code TT, even if they show as overtime on the paycheck.

A payroll system that reports one lump overtime figure per pay period can't support accurate Box 12, Code TT reporting. You need punch-level records tying each premium hour to a specific workweek and confirming the 40-hour federal threshold was crossed in that seven-day period, not just across the pay cycle.

Employer action checklist:

• Confirm payroll software is configured to report FLSA overtime premiums as a separate pay component, not bundled with base wages or non-FLSA premiums.
• Lock in your fixed workweek boundary in writing and apply it consistently. Overtime is computed seven days at a time, never averaged across pay periods.
• Review employees in daily-overtime states such as California, Alaska, Colorado, and Nevada. Their FLSA premiums and state-required daily premiums need separate tracking codes in payroll.
• Do not adjust FICA withholding for any worker based on this deduction. The law changed nothing about payroll tax obligations.
• Tell employees the benefit is a tax-return item, not a paycheck change. A brief explanation at the start of a heavy overtime season prevents a lot of confusion.
• Set a calendar reminder in November or early December to verify W-2 premium totals before year-end closes. Correcting a W-2 after filing is time-consuming and often requires employee cooperation.

Clean time records are the foundation of all of this. A free time clock that timestamps punches and totals hours against your fixed workweek gives you the weekly FLSA overtime premium calculation automatically. That same data supports both wage-and-hour compliance and accurate Box 12, Code TT W-2 reporting. The overtime calculator lets you verify any week's premium by hand before payroll runs, which is useful for catching discrepancies before they become a filing problem.

Employers who were already tracking time accurately by workweek will find the new reporting mandate is mostly a payroll software configuration update. Employers whose records are reconstructed from memory at pay period end face a bigger project, and the mandatory W-2 deadline is what enforces the timeline.

The OBBB Act made no change to the employer's cost of overtime. The premium still costs 1.5 times the base rate, FICA still applies in full, and workers' comp premiums follow gross pay. This law's financial benefit flows entirely to the employee at filing time. Where it touches you directly is accurate reporting and managed expectations. Both are achievable with disciplined time tracking in place before December arrives.

This article reflects IRS guidance and Warren Averett analysis current as of mid-2026. Verify current rules with your payroll provider or tax advisor, as IRS guidance on Box 12, Code TT reporting continues to develop. Nothing here is legal or tax advice.

Frequently Asked Questions

Does no tax on overtime automatically change my paycheck withholding?

No. The deduction is claimed on the annual federal tax return, not applied to each paycheck. Withholding is unchanged unless the employee submits an updated Form W-4. The benefit shows up at filing time as a larger refund or smaller balance due, not in the weekly or biweekly check.

Who qualifies for the no tax on overtime deduction?

FLSA non-exempt employees who have a valid Social Security number and file as Single, Head of Household, or Married Filing Jointly. Married Filing Separately filers are not eligible. Only the premium portion of federally required overtime (hours past 40 in the workweek at 1.5x) qualifies, not the base pay portion of those hours.

Does FICA change under the no tax on overtime law?

No. Social Security and Medicare taxes still apply to every dollar of overtime pay, including the premium portion. The One Big Beautiful Bill Act made no changes to payroll taxes. Employers must not reduce FICA withholding based on this deduction; doing so creates a separate compliance problem.

When does the no tax on overtime deduction expire?

December 31, 2028. The deduction covers tax years 2025, 2026, 2027, and 2028. Starting with tax year 2029, overtime premiums return to full federal income tax treatment unless Congress passes an extension before that date.

Does no tax on overtime apply to state income taxes?

Generally no. The federal deduction applies on the federal return only. Most states had not passed conforming legislation as of mid-2026, so workers in most states still owe full state income tax on their overtime pay, including the premium. Check your state revenue agency for current guidance before assuming state conformity.