No Tax on Overtime: Breaking Down the One Big Beautiful Bill Act’s Impact on Overtime Pay
By
Antonio Del Cueto, CPA
on
August 1, 2025
The One Big Beautiful Bill Act is one of the most talked-about tax proposals in recent history, and for good reason. Among its high-profile features is a provision that offers federal income tax relief on overtime earnings, a measure aimed squarely at boosting take-home pay for hardworking Americans who put in extra hours.
If you are an hourly worker, contractor, or employer trying to understand what this means for your bottom line, this blog post provides a clear breakdown of the new “no tax on overtime” policy. We will explain who qualifies, how much income is deductible, and what this means for your taxes through 2028.
Let’s dive into what is actually in the Big Beautiful Bill and why this overtime deduction could change the way millions of Americans view work beyond 40 hours a week.
What Is in the Big Beautiful Bill?
At its core, the Big Beautiful Bill, formally known as the One Big Beautiful Bill Act, introduces targeted tax relief for working Americans. It includes temporary but substantial deductions for:
Qualified tip income
The premium portion of overtime pay
Childcare expenses and dependent care
An expanded standard deduction for middle-income households
While each provision has unique eligibility requirements, all aim to reduce the federal income tax burden on working-class and middle-class households.
For workers who regularly clock overtime, the most direct benefit comes from the overtime deduction. This is a new line item designed to reward those who go above and beyond.
Big Beautiful Bill Summary: No Tax on Overtime
Will you maximize your refund with the new overtime tax deduction?
The One Big Beautiful Bill Act allows taxpayers to deduct a portion of their overtime compensation from federal taxable income.
Specifically, the bill exempts the premium pay portion of overtime. This means the 1.5x rate paid for hours worked beyond 40 in a week. Here is how it works:
Deduction cap (individual): Up to $12,500 per year
Deduction cap (married filing jointly): Up to $25,000 per year
Income type: Overtime premiums only (not base wages)
Reporting required: Employers must report qualifying overtime earnings
Effective tax year: Begins in 2025, ends after 2028
That means if you earn $18,000 in overtime next year but only $11,000 qualifies as the premium pay above your normal wage, you may be eligible to deduct the full $11,000. This reduces your taxable income and may move you into a lower tax bracket.
Section
Key Points
Overview
The bill proposes making overtime wages exempt from federal income tax.
Policy Details
Overtime pay (hours worked beyond 40/week) would not be taxed federally.
Eligibility
Applies to W-2 employees eligible for overtime under current labor laws.
Duration
The exemption would begin in 2024 and is not retroactive.
Withholding Rules
Employers must still withhold Social Security and Medicare taxes.
Compliance Considerations
Employers must adjust payroll systems to exclude overtime from income tax.
How the Overtime Deduction Works
A simple example:
Let’s say you earn $30 per hour and typically work 45 hours per week. That means:
40 hours at $30 = $1,200
5 hours at $45 (1.5x pay) = $225
Of that $225, your premium overtime pay (the extra 0.5x) equals:
5 hours × $15 = $75 per week
Over a year, if you worked 50 weeks of similar overtime:
$75 × 50 weeks = $3,750 in deductible overtime income
You would be able to subtract that $3,750 directly from your adjusted gross income, in addition to any standard or itemized deductions. This can lead to meaningful tax savings.
Who Can Claim It?
Hourly W-2 employees who receive time-and-a-half overtime pay
Gig workers or 1099 contractors, if their income clearly includes extra pay for overtime hours
Workers in eligible industries, including healthcare, manufacturing, hospitality, logistics, and more
The deduction is available to all filers, regardless of whether they itemize or take the standard deduction.
What Qualifies as Overtime Income?
According to the legislation, the deduction applies only to the premium portion of time-and-a-half pay. This refers to the additional half-time pay above your base hourly wage.
Pay earned for hours worked in excess of 40 per week, based on FLSA standards
What does not count:
Base hourly wages
Bonuses or commissions
Holiday pay or hazard pay (unless explicitly tied to overtime hours)
Flat-rate contractor income without breakdowns
Employers will need to provide accurate wage statements and year-end reporting that clearly distinguish overtime premiums from regular pay.
No Tax on Overtime: Why It Matters
The “no tax on overtime” provision aims to directly reward extra effort and long hours, especially among workers in industries that rely on overtime to meet demand.
Key benefits:
More take-home pay for hourly workers
Lower effective tax rates for middle-income earners
Incentive to work overtime without facing steeper marginal tax rates
Help offset the cost of time away from family or rest
In industries like healthcare, warehousing, and emergency services, where overtime is often unavoidable, this deduction provides real financial relief.
It also sends a clear policy signal: working overtime should be rewarded, not penalized through higher taxes.
What Employers Need to Know
Businesses that employ hourly workers will have a new administrative task starting in the 2025 tax year. They must accurately report overtime premiums.
Employer responsibilities include:
Breaking out overtime premiums on payroll records
Reporting qualified overtime pay on Forms W-2 (or 1099 for contractors)
Retaining documentation in case of IRS audits or employee questions
Updating payroll systems to comply with IRS guidelines (forthcoming)
Failing to distinguish between regular and premium wages may prevent employees from claiming the deduction. Clear reporting is essential.
How can Taxfyle help?
Finding an accountant to manage your bookkeeping and file taxes is a big decision. Luckily, you don't have to handle the search on your own. At Taxfyle, we connect small businesses with licensed, experienced CPAs or EAs in the US. We handle the hard part of finding the right tax professional by matching you with a Pro who has the right experience to meet your unique needs and will manage your bookkeeping and file taxes for you.
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