The OBBBA “No Tax on Overtime” provision

The One Big Beautiful Bill Act (OBBBA), enacted in July 2025, introduced a headline change that quickly caught employees’ attention: “No Tax on Overtime.” The OBBBA overtime benefit functions as a federal tax deduction, not a tax credit. That means the rule reduces your taxable income rather than lowering your tax bill dollar‑for‑dollar. You still pay tax at your normal rate, just on a smaller amount of income. While this deduction can lower how much of your overtime earnings are subject to federal income tax, it does not directly reduce the total tax you owe. Federal withholding on paychecks continues unchanged.

‍Effective Period
The OBBBA overtime deduction applies for tax years 2025 through 2028.
Wages earned in 2025 will first be claimed on 2026 tax returns.

Who Qualifies
To qualify, overtime pay must meet the definition of FLSA‑required overtime:

Non‑exempt employees,
Working over 40 hours in a workweek,
Paid at least time‑and‑a‑half under federal FLSA rules.

Who Does Not Qualify
Certain categories are excluded:

Overtime paid only under state laws, employer policy, or union contracts (if it does not meet FLSA overtime rules).
Salaried exempt employees, including executive and professional roles.

Deductible Amount: Only the “Premium Portion”
Workers may deduct only the premium portion, the “extra half” in time‑and‑a‑half.
For example: If you earn $30/hour and overtime pays $45/hour, only the $15/hour premium qualifies or “the pay that exceeds the regular rate of pay.”

Deduction Limits & Phase‑Out Thresholds
Maximum Annual Deduction:

$12,500 for single filers
$25,000 for married filing jointly
‍

The deduction begins phasing out at:

$150,000 Modified AGI (single)
$300,000 Modified AGI (joint)

Reduced by $100 for every $1,000 over the threshold.

How to Claim the Deduction On Your Tax Return
The deduction is claimed as an above the line adjustment, reducing AGI even if you do not itemize.

How Employers Report It Tax Year 2025:

Employers are not required to separately report qualified overtime on the W‑2.
Some may voluntarily show it in Box 14 as an FYI (e.g., “QUAL OT”).

For Tax Years 2026–2028:

Employers must use new W‑2 reporting codes specifically for qualified overtime amounts.

Calculating Qualified OT Yourself (2025 Only)
If your employer does not report qualified overtime separately in 2025, the IRS allows employees to use a reasonable method, such as:

Using one‑third of total overtime pay (if paid at 1.5×)
Calculating the exact premium portion from paystubs
Using employer payroll statements

Interaction with Other Taxes
The deduction applies only to federal income tax. It does not reduce, eliminate, or change:

Social Security (FICA)
Medicare
State or local income taxes

These withholdings continue as usual on overtime pay.

Key Takeaways‍

The OBBBA provision is a federal income tax deduction, not a tax credit.
It lowers taxable income, not the tax owed directly.
Applies to 2025–2028 tax years.
Only the premium portion of FLSA‑qualified overtime counts.
Maximum deduction: $12,500 single / $25,000 joint with income phase‑outs.
Available to both itemizers and non‑itemizers.
To benefit, track your FLSA‑qualified overtime premium amounts and report them on Form 1040 Schedule 1‑A under “Qualified overtime compensation.”

‍