“No Tax on Overtime”: What You Need to Know Under the OB3 Tax Changes in 2025

In 2025, a major new federal tax law, the One Big Beautiful Bill Act (OB3), introduced a headline-grabbing provision: “No Tax on Overtime.” While the name sounds like overtime pay is completely free from taxes, the reality is a little more nuanced. Let’s break down what it actually means, who can benefit, how much you can claim, and the rules for taking it.

What Is the “No Tax on Overtime” Change?

The OB3 creates a new federal income tax deduction for certain earnings on overtime that is earned in tax years 2025 through 2028. Instead of treating overtime pay as entirely nontaxable, as the headlines suggest, the law lets eligible workers deduct part of their overtime earnings from their taxable income when they file their federal tax return.

Important:
This isn’t a tax credit or a change to payroll withholding (yet) — it’s a deduction you claim on your tax return. For now, overtime will still show up as wages on your W-2.

Who Can Take This Deduction?

This deduction is available to workers who receive qualified overtime compensation. To qualify:

• Your overtime must be paid under the Fair Labor Standards Act (FLSA) definition, which is typically time-and-a-half pay for hours worked over 40 in a workweek.

• The overtime premium (the extra portion above your regular hourly rate) is what can be deducted.
  • For example, if your regular pay is $20/hour and overtime pay is $30/hour, the qualified overtime portion that may be deducted is $10/hour.
• Overtime paid under state law that is more generous than FLSA  doesn’t count. For example, CA requires overtime pay when an employee works over 8 hours in a day, even if they don’t work 40 hours that week. This overtime is not deductible. Only when the taxpayer works over 40 hours is the overtime eligible.

• Overtime rates above FLSA minimums (such as double-time) may not qualify.

• Overtime paid under a collective bargaining agreement is generally not deductible. However, there are exceptions. Police officers and firefighters will typically still qualify.
• Non-FLSA workers, most commonly independent contractors, do not qualify unless they receive qualified overtime compensation reported on a Form 1099-NEC.
• You must file a federal tax return with your Social Security number and file jointly if you are married.

How Much Can You Deduct?

The deduction has annual limits:

• Up to $12,500 for single taxpayers.
• Up to $25,000 for married filing jointly.

This cap applies to the qualifying premium portion of overtime pay, not your total overtime earnings. It’s an above-the-line deduction, which means it can reduce your taxable income whether or not you itemize.

An important note is that this limit is per return, not per taxpayer. For example, let’s say a taxpayer earns $20,000 of qualified overtime. If they file Single, $12,500 is deductible. If they file Married Filing Jointly, the entire $20,000 would be deductible even if the spouse earned no overtime pay.

Income Limits and Phase-Outs

To prevent high-income taxpayers from taking the full benefit, the deduction begins to phase out once your Modified Adjusted Gross Income (MAGI) passes certain thresholds:

• For single filers: $150,000.
• For joint filers: $300,000.

As your income rises above the thresholds, the amount you can deduct shrinks until it is eliminated. For single filers the phaseout is complete at $275,000 and $550,000 for joint filers.

How To Claim the Deduction

• When you file your 2025 tax return (in 2026), calculate and claim the deduction on Schedule 1-A, even if your W-2 or 1099 doesn’t separately break out qualified overtime for 2025.
• Starting in 2026, employers are expected to provide clearer reporting of qualified overtime on your W-2 or pay statements.

Key Takeaways

• You can deduct qualified overtime compensation from your federal taxable income for 2025–2028.
• The deduction applies only to the overtime premium, not regular pay.
• Maximum deduction is $12,500 (single) or $25,000 (joint).
• There are income phase-outs above $150K (single) and $300K (joint).
• You must claim it on your tax return

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The information provided in this article is intended for general informational purposes only and does not constitute tax, legal, or financial advice. Tax situations vary based on individual circumstances. You should consult with a qualified tax professional regarding your specific situation before making any decisions.