No Tax on Overtime?

With the One Big Beautiful Bill (OBBB) passing this summer, what does this mean for those with overtime pay?

For tax years 2025 through 2028 (yes, it’s retroactive for 2025), you can deduct qualifying overtime pay from your federal taxable income. The deduction applies only to the overtime “premium” portion — the “half” in “time-and-a-half.”

• Annual Cap: $12,500 per filer, or $25,000 if married filing jointly.

• Example: If you earn $50/hour normally and $75/hour for overtime, the extra $25/hour qualifies for this deduction.

Important Notes:

• This is not a payroll tax break — Social Security and Medicare (FICA) taxes still apply to all wages.

• If you own a business and pay yourself “overtime,” consult a CPA. The rules are written for employees covered under the Fair Labor Standards Act (FLSA), not owners.

• Employers will continue to withhold taxes on your full paycheck. You’ll receive the benefit when filing your tax return.

• To qualify, your employer must track and report overtime properly on your W-2 or 1099.

Income Limits:

• The deduction begins phasing out at $120,000 (single) or $240,000 (married filing jointly).

• It phases out completely at $150,000 (single) or $300,000 (MFJ).

Best Practices:

• Save your pay stubs.

• Monitor your income to stay under the threshold.

• Confirm your employer is tracking overtime correctly.

Smart Planning Tip:

If you receive a larger refund at tax time, consider investing those dollars or using them to strengthen your financial plan — rather than treating it like a windfall.