You have likely heard the buzz about a potential provision for “No Tax on Overtime” in the One Big Beautiful Bill, passed into law on July 4th, 2025. Although this bill does affect taxability of compensation on overtime hours, it is not so straight forward. Here is what you can expect for the tax treatment of overtime hours for tax years 2025 through 2028:
The provision allows for a deduction in addition to the standard deduction to the extent of qualified overtime reported on the employee’s W-2. The deduction is not to exceed $12,500 per individual, provided the filer has reported a valid SSN on their return. This $12,500 ceiling is applied per taxpayer SSN, even if the employee is married filing jointly.
The deduction amount is also reduced (but not below zero) by $100 for each $1,000 by which the taxpayer’s modified adjusted gross income (MAGI) exceeds $150,000 ($300,000 for taxpayers filing a joint return). Therefore, the overtime deduction amount phases out completely when the taxpayer’s MAGI reaches $275,000 ($550,000 for joint filers).
Employers are responsible for keeping track of overtime wages so that these can be separately stated on the W-2. The wages reported here should only be compensation that exceeds the regular rate of pay as defined by the Fair Labor Standards Act (FLSA). As an employee, be sure to review your W-2 for accuracy to ensure your overtime pay is properly reported. If you believe your W-2 needs to be corrected, ask your employer to file a correction so that you can claim the full deduction available to you.
The IRS has not yet provided clear guidance on how this bill might affect contractors or self-employed individuals who consider themselves to work “overtime.” As the law stands right now, this deduction appears to only be available to W-2 filers.
