No tax on overtime: Federal tax deduction on qualified overtime

←About the One Big Beautiful Bill

"No tax on overtime" is a federal income tax deduction introduced in the One, Big, Beautiful Bill in 2025. It allows non-exempt workers who work over 40 hours in a week to reduce their year-end federal income tax liability (up to $12,500 for single filers, $25,000 if filing jointly) when they file their taxes for tax years 2025–2028.

See how to enter OBBB qualified overtime during a pay run→

Continue withholding income tax
Employers with employees who earn overtime are still required to withhold and remit federal income tax on their employee's income. Employees may claim a deduction on overtime pay when filing their taxes at the end of the year. Employers will need to provide employees with a report of their total qualified overtime pay in order for them to claim this deduction.

Summary of this tax deduction

• Above-the-line federal income tax deduction
• Available to non-exempt, overtime-eligible workers
• Employers must continue to withhold payroll tax on all overtime pay
• Only FLSA-defined overtime is considered "eligible overtime"
• Employers must track and report eligible overtime premium pay
• $12,500 max deduction per individual ($25,000 if filing jointly)
• Income phase-out begins at $150,000 ($300,000 for joint filers)
• Effective for tax years 2025 through 2028

What tax is deductible from overtime pay

• The “No tax on overtime” deduction is limited to withheld Federal Income Tax (FIT), and does not apply to any other payroll tax, such as Social Security and Medicare, or state tax.
• The deduction is further limited to FIT withheld from overtime premium compensation (0.5 x regular rate), and does not apply to any regular-rate compensation.
• In instances where double-overtime is paid, the amount that can be claimed is still only 0.5 x regular rate of pay.

What qualifies as "overtime" for this deduction

• For this deduction, “overtime” refers only to time worked above 40 hours in a work week, as defined under the Fair Labor Standards Act (FLSA).
• Overtime as defined under state or local overtime laws, workers' unions, or company overtime policies, is not eligible for this deduction.
• Only the overtime premium compensation (0.5 x regular rate) may be deducted.

Who qualifies for this deduction

• Hourly, non-exempt workers who are eligible for overtime compensation under the Fair Labor Standards Act (FLSA) may claim this deduction when filing their taxes.
• This is an “above the line” deduction, meaning workers may claim the deduction even if they take the standard deduction.
• The deduction begins to phase out at $150,000 of adjusted gross income ($300,000 for joint filers). For every $1,000 of income above the threshold, the deduction is reduced by $100.
• To claim the deduction, taxpayers must have a valid Social Security number.

What doesn't qualify for this deduction

If you’re subject to state or local overtime laws that require overtime pay for hours worked below 40 in a week (such as over 8 hours in a day, or 7th consecutive day), this non-FLSA overtime does not qualify for the tax deduction. Such overtime must be subtracted from "qualified overtime" pay.

What employers need to do for the 2025 tax year

For employees to be able to claim this deduction, employers must provide employees with a statement of all qualified FLSA overtime pay they received in 2025.

Because the Act applies retroactively to overtime earned in 2025, employers, including those in states with local overtime laws, will be allowed to “approximate” the amount of qualifying (FLSA) overtime using a “reasonable method”.

How to determine qualified overtime pay for employees during tax year 2025:

Because the deduction employees can claim only applies to overtime premium pay of 1/2 (.5) their regular rate of pay for hours worked over 40 in a week (FLSA overtime), you'll need to determine this amount for each eligible employee. While double-overtime pay may be higher than overtime pay, only the overtime premium of 1/2 (.5) their regular rate of pay can be claimed for the deduction.

To calculate the amount of overtime pay employees may claim, you'll need to:

• Run an Employee Summary report
• Total overtime and double overtime hours for each employee
• Subtract any overtime hours that do not qualify
• Calculate the overtime premium pay for each employee 
• Provide each employee with their total qualified overtime pay

 Treasury, IRS provide guidance for individuals who received tips or overtime during tax year 2025→

How to run an Employee Summary report

Go to Payroll Reports by clicking Payroll, then Reports, and select Employee Summary from the list.

• In the legacy menu, you'll find Employee Summary in the Reports tab.

  

Select or enter January 1st (01/01/2025) in the "First Check Date" field.

Select or enter December 31st (12/31/2025) in the "To Check Date" field.

Once you've selected the first and last dates of the year as the range for your report, click Update LIst.

Total overtime and double overtime hours for each employee

You'll find overtime and double overtime hours listed for each employee in the report (unless no overtime was worked). For each employee with overtime pay, you'll need to use their total overtime and double-overtime hours to calculate their qualified overtime pay. You can write these totals down, or export this report as a spreadsheet to get started.

Subtract any non-FLSA qualified overtime

If you pay employees in a state or locality with its own overtime laws, such as California, which requires employers to pay overtime for hours worked above eight (8) in a day, or on the seventh (7th) consecutive day, these non-FLSA overtime hours must be subtracted from the employee's total overtime hours.

Provide each employee with their total qualified overtime pay 

Once you have the qualified overtime pay for each employee, it's recommended that you provide them with this amount before January 31st. You can do this by providing a written statement to each employee

IRS resource for employees→

No tax on tips

Do you employ tipped workers? OBBB also introduced a similar federal income tax deduction on tip income, which allows tipped employees to reduce their year-end federal income tax liability (up to $25,000 per individual) when they file their taxes for tax years 2025–2028.

Read more→

v7.25