Imagine keeping more of your hard-earned overtime pay without a federal tax bite. On July 4, 2025, President Donald Trump signed the One Big Beautiful Bill Act (OBBB) into law, delivering that benefit to millions of American workers. A key provision offers a temporary federal income tax deduction on overtime pay, potentially saving eligible workers up to $2,000 annually.
The No Tax on Overtime (NTOO) provision, effective for tax years from Jan. 1, 2025, to Dec. 31, 2028, allows workers to deduct up to $12,500 in qualified overtime pay ($25,000 for joint filers) from their federal taxable income. As an above-the-line deduction, it’s available whether taxpayers itemize or take the standard deduction.
The deduction applies only to overtime compensation required under the Fair Labor Standards Act, typically for non-exempt hourly workers such as those in manufacturing, health care, or retail. Exempt employees, such as salaried professionals, are ineligible, as they don’t qualify for FLSA overtime pay. The deduction phases out for individuals with modified adjusted gross income above $150,000 ($300,000 for joint filers) at a rate of $100 per $1,000 over the threshold.
The deduction applies solely to federal income taxes, leaving overtime pay subject to Social Security, Medicare, and state or local taxes. The White House estimates workers could save up to $2,000 annually, boosting disposable income for middle-income households reliant on overtime. The policy also incentivizes additional overtime work, potentially easing labor shortages in high-demand industries.
The Tax Foundation projects the broader tax provisions in the OBBB, including NTOO, will “increase GDP by about 0.2 percent in 2025, rising to 1.2 percent in 2026 up to a peak of 1.5 percent in 2028 before falling and stabilizing at the long-run GDP increase of 1.2 percent. Temporary tax provisions including tax deductions for overtime and tipped income along with temporary expensing for structures would boost GDP from 2025 to 2028 before phasing out.”
Critics highlight limitations. The Tax Policy Center claims that low-income workers would see minimal benefits and that this provision mainly benefits high-income households. The Bipartisan Policy Center (BPC) argues the provision violates horizontal equity, as workers with similar incomes face different tax burdens based on overtime eligibility. BPC also warns it could incentivize employers to restructure pay, risking FLSA non-compliance, though labor dynamics will depend on employer-employee negotiations.
Employers must report qualified overtime pay separately on Form W-2 for employees or Form 1099 for non-employees, such as independent contractors. For 2025, businesses may approximate these amounts using methods specified by the Treasury Secretary, with updated IRS guidance pending. This may require companies to update payroll systems to track overtime separately.
The No Tax on Overtime provision offers a meaningful lifeline for hardworking Americans, putting more money back in their pockets and fueling economic growth. By rewarding overtime efforts, the policy empowers workers to achieve greater financial stability while supporting industries critical to the nation’s economy. As businesses adapt and IRS guidance clarifies implementation, millions stand to benefit from this forward-thinking tax break, paving the way for a stronger, more prosperous future through 2028.