"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 earn overtime 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.
The federal tax deduction only applies to overtime premium pay (the "half" in "time-and-a-half") earned for working over forty (40) hours in a week. Overtime pay earned under the requirement of state law, such as in California, which requires overtime pay for working more than eight (8) hours in a day, is not eligible for a tax deduction.
More help articles and federal resources about this bill→
Reporting requirements for tax years 2026-2028
For tax year 2025, employers were allowed to approximate qualified overtime pay for employees.
However, for employees to be able to claim a deduction on qualified overtime income earned in tax years 2026-2028, employers are required to report qualified overtime on each employee's pay stub, as well as on year-end forms.
To do this, you'll need to:
- Enter or import overtime amounts during each pay run
- Enter qualified overtime amounts during each pay run (some overtime may not qualify)
Warning:
If you're using integrated time tracking to import hours, you'll still need to enter qualified overtime hours when processing payroll. Do not use custom pay items to report overtime hours.
Enter qualified overtime hours when running payroll
For an employee who earns qualified overtime pay to claim a deduction during tax years 2026-2028, qualified overtime amounts must be reported on each pay statement they receive throughout each year, as well as on their W-2 at the end of the year. Provided all qualified overtime hours are entered during each pay run, OnPay automatically handles calculating and reporting qualified overtime premium pay.
The below instructions demonstrate entering qualified overtime hours using the Improved Pay Run. If you haven't upgraded yet, select "See instructions using Legacy Pay run".
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When running payroll, click the edit pencil to enter hours for an employee. If you use integrated time tracking to import hours, you'll still need to enter qualified overtime hours.
Start by entering the employee's regular hours, overtime hours, and any double overtime hours.
IMPORTANT:
You must enter hours in the "Overtime" field before entering hours under "OBBB Qualified OT". Hours entered under "OBBB Qualified OT" cannot be greater than the total Overtime/Double OT hours entered. This also applies to "Cash Tips" and "Controlled Tips" when entering "OBBB Qualified Tips".Once you've entered the employee's overtime hours, you can enter OBBB qualified hours, which are any hours worked above forty (40) in a week. You cannot enter qualified overtime hours until overtime hours have been entered. Qualified overtime hours cannot exceed the total overtime and double overtime hours entered. It is the employer's responsibility to accurately report qualified overtime hours.
Note:
In the above example, Shelley is paid bi-weekly. In this pay period, she worked a total of eighty (80) regular hours, and five (5) overtime hours. Because she worked over forty (40) hours in one or both weeks of this pay period, the full amount of these overtime hours may qualify for the deduction. But overtime hours awarded solely under state or local overtime law do not qualify.Click Preview Check to see how these overtime will appear on their pay stub.
Note that overtime and double overtime hours are listed separately from OBBB Qualified overtime hours. -
When running payroll, click the edit pencil to enter hours for an employee. If you use integrated time tracking to import hours, you'll still need to enter qualified overtime hours.
Don't see this option?
If you don't see the "edit pencil" icon when entering hours, contact our support team for help. We may need to upgrade your payroll process to include OBBB eligible overtime entries.Start by entering (or importing) overtime hours for the employee. Once overtime hours have been entered, you'll see an additional box labelled "OBBB Qualified Hours".
After entering an amount under "Overtime Hours", you can enter OBBB qualified hours in the second box. This amount cannot exceed the amount of overtime hours in the first box, because it's for indicating the amount of overtime that qualifies for the deduction.
Once the qualified overtime amount has been entered, click Update.
Note:
In the above example, Anthony earned a total of 5 overtime hours. The full amount of these hours qualify, and this is reflected by entering the full amount in the "OBBB Qualified Hours" field.Click Preview Check to see how this overtime will appear on their pay stub.
Note that overtime and double overtime hours are listed separately from OBBB Qualified overtime hours.
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