New Federal “No Tax on Overtime” Law Brings Major Change for Workers

WASHINGTON, D.C. — A major tax overhaul passed in 2025 has introduced a new federal tax benefit for overtime earnings, effective for tax years 2025 through 2028, bringing notable relief to many American workers.

Under the One Big Beautiful Bill Act (Public Law 119-21), employees who earn overtime pay under the federal Fair Labor Standards Act (FLSA) can now deduct a portion of their overtime income from federal taxable income. This change effectively reduces the amount of federal income tax owed on overtime earnings — though Social Security and Medicare (FICA) taxes continue to apply as before.

Here’s how it works: the deductible portion is the “premium” overtime pay — generally the extra half of the “time-and-a-half” rate paid for hours worked beyond 40 in a week. For single filers, the deduction can be up to $12,500 per year, and for married couples filing jointly, up to $25,000, subject to income limits and phaseouts.

To qualify, wage earners must be W-2 employees, and their modified adjusted gross income must fall under certain thresholds. The deduction phases out for higher earners, beginning at $150,000 for single filers and $300,000 for joint filers.

Employers also have new reporting requirements: qualified overtime compensation must be separately reported on employees’ W-2 forms to help taxpayers claim the deduction.

While the law does not eliminate all taxes on overtime (FICA and many state taxes still apply), experts say it could provide meaningful tax savings for workers who regularly clock extra hours.

The change marks one of the more talked-about provisions of the 2025 tax legislation and is expected to influence payroll systems and tax preparation in the coming filing seasons.