Is Overtime Taxed? (The 'No Tax on Overtime' Rule, Explained)
Overtime has always been taxed like regular wages — which is why the federal 'no tax on overtime' change caused so much confusion. Here's what actually changed, what didn't, and what it means for your paycheck.
The myth and the old reality
Overtime was never taxed at a special higher rate. Bigger overtime paychecks sometimes had more withholding because withholding tables annualize each check, but at tax time it was all just wages. That's the baseline the new rule changes.
What the federal 'no tax on overtime' deduction does
Under the 2025 federal tax law, workers can deduct the overtime premium portion of their pay — the extra 'half' in time-and-a-half required by the FLSA — from federal income tax, up to an annual cap (initially $12,500 single / $25,000 joint), phasing out at higher incomes. It applies for tax years 2025 through 2028 unless extended.
Only the premium qualifies: if you earn $20/hour and overtime pays $30, the deductible piece is the extra $10/hour — not the whole $30. And it's a deduction claimed on your return, not money your employer skips withholding by default.
What's still taxed
Social Security and Medicare (FICA) still come out of every overtime dollar, and most states still tax overtime as normal income. Employers must still track and report overtime precisely — in fact the deduction makes accurate overtime records more important, since the premium amount now has tax consequences for the employee.
Verify the current-year rules with the IRS or a tax professional before relying on specific figures — caps and phase-outs can change.
FAQ
Is overtime taxed at a higher rate?
No — that's a myth. Overtime is ordinary wages. Withholding can look bigger on a large check, but the tax rate is the same.
What does 'no tax on overtime' actually mean?
A federal deduction (2025–2028) for the overtime premium portion of pay — the extra half in time-and-a-half — up to an annual cap, with income phase-outs. FICA and most state taxes still apply.
Do employers stop withholding tax on overtime?
Not automatically. The benefit generally comes when the employee claims the deduction on their federal return; payroll still reports overtime as usual.
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