Beginning in 2025, a new federal tax rule allows certain workers to deduct part of their overtime pay when filing their tax return. This change was created under the One Big Beautiful Bill Act and is often described as the “No Tax on Overtime” provision. While this sounds straightforward, the deduction applies only in specific situations, and not all overtime pay qualifies.
This article explains, in simple terms, who can claim the overtime deduction, what portion of overtime pay qualifies, and who is excluded.
What Is the Overtime Deduction?
The overtime deduction allows eligible workers to reduce their taxable income by the overtime premium they earned during the year. This means the extra portion of pay you receive for working overtime hours may reduce your federal income tax.
It is important to understand that this deduction does not remove payroll taxes. Social Security and Medicare taxes still apply to overtime pay. The deduction only affects federal income tax.
There is also a limit on how much can be deducted. The maximum deduction is $12,500 per year for a single filer and $25,000 for married couples filing jointly. The deduction begins to phase out for individuals earning more than $150,000 and for joint filers earning more than $300,000. Married taxpayers filing separately are not eligible.
What Counts as “Qualified Overtime”?
Not all overtime pay qualifies for the deduction. Only overtime that is required under federal labor law qualifies. This generally means overtime paid when an employee works more than 40 hours in a workweek and is paid at least time-and-a-half.
Only the extra “premium” portion of overtime qualifies. For example, if your regular hourly rate is $20 and you earn $30 per hour for overtime, only the extra $10 portion is considered qualifying overtime. Your normal hourly pay does not qualify for the deduction.
If your employer pays double time, holiday pay, or other extra bonuses that are not required by federal law, only the portion that would have been required under federal overtime rules qualifies. Any extra amounts beyond that do not count.
Who Is Eligible for the Overtime Deduction?
The deduction is available only to workers who are eligible for overtime under federal law. This generally includes hourly workers and certain salaried employees who are classified as non-exempt.
Many salaried professionals are excluded because they are not entitled to overtime under federal rules. This includes many managers, executives, administrative professionals, and highly compensated employees.
Independent contractors do not qualify for the overtime deduction, even if they work long hours or receive extra pay. The deduction applies only to employees who are legally entitled to overtime pay.
If you are unsure whether you are eligible for federal overtime, your employer or payroll department can usually confirm this.
How Do You Know How Much Overtime You Can Deduct?
For 2025, most tax forms will not clearly separate qualifying overtime from regular wages. Because of this, workers may need to rely on pay stubs, payroll summaries, or year-end earnings statements to determine the overtime premium they earned.
If your pay stub already shows an “overtime premium” or similar line item, that amount may generally be used. If your pay stub combines overtime and regular wages into one number, the IRS allows reasonable methods to estimate the qualifying portion based on how overtime is paid.
The IRS expects taxpayers to make a good-faith effort and to keep records supporting the calculation
Special Situations to Be Aware Of
Some workers, such as public safety employees, healthcare facility workers, and government employees, may have different overtime rules. In these cases, overtime may be calculated over longer work periods or paid through compensatory time. Only the portion that represents required overtime pay qualifies, and it generally qualifies only in the year it is paid.
State-required overtime or employer-provided bonuses may not qualify unless they also meet federal overtime rules.
Recordkeeping Matters
If you plan to claim the overtime deduction, it is important to keep copies of your pay stubs, payroll summaries, and any statements showing overtime pay. These records support your calculation if the IRS ever asks for documentation.
Even though the law allows estimates for 2025, taxpayers are still responsible for proving eligibility and accuracy.
Final Thoughts
The overtime deduction can provide real tax savings for eligible workers, but it is more limited than many people expect. Only federally required overtime qualifies, only the premium portion counts, and many salaried and professional workers are excluded entirely.
Before claiming the deduction, make sure you understand whether your overtime qualifies and whether your income level allows the benefit. When in doubt, professional tax guidance can help you avoid mistakes and future IRS issues.