When does no tax on overtime start” is now officially answered: January 1, 2025. Workers who earned eligible overtime at any point after this date can expect the tax benefit when filing tax returns for the 2025 tax year in 2026.
When does no tax on overtime start? This is the key question that millions of American workers are asking right now, as new federal legislation changes the way overtime pay is taxed. President Trump’s “One Big Beautiful Bill Act” has officially introduced a high-profile deduction for overtime pay, and its impact is already being felt nationwide.
The law, signed on July 4, 2025, provides an above-the-line deduction for eligible overtime wages earned as of January 1, 2025. Workers who qualify may now deduct a significant portion of their overtime earnings from federal taxable income, a move expected to save many up to $2,000 each year.
No Tax on Overtime: When and Who Benefits
The “No Tax on Overtime” provision has begun retroactively from January 1, 2025, and will be in effect through the end of 2028. Here’s how it works:
- Qualifying employees can deduct up to $12,500 of overtime pay ($25,000 for joint filers) annually from their federal taxable income.
- The deduction applies to overtime pay that exceeds the standard hourly rate, usually the “half” portion of the “time-and-a-half” formula under the Fair Labor Standards Act (FLSA).
- It is available to most hourly workers who exceed 40 hours per week, but higher earners see a phase-out starting at $150,000 for single filers or $300,000 for joint filers.
- Payroll taxes (Social Security and Medicare), as well as any state or local income taxes, still apply.
- Not all overtime qualifies; only overtime pay as defined under Section 7 of the FLSA is eligible.
Key Points Summary
- Deduction applies retroactively from January 1, 2025, through 2028.
- Up to $12,500 deduction for single filers, $25,000 for joint filers.
- Applies to overtime as per FLSA rules (hours over 40 per week).
- Deduction phases out for incomes above $150,000 ($300,000 joint).
- Payroll, Social Security, and Medicare taxes still apply.
- Full details being clarified by IRS; employers must track qualifying overtime on pay statements.
Read Also-When Does No Tax on Overtime Start? Everything You Need to Know in 2025
Inside the Legislation: No Tax on Overtime Start Date and Important Details
When does no tax on overtime start” is now officially answered: January 1, 2025. Workers who earned eligible overtime at any point after this date can expect the tax benefit when filing tax returns for the 2025 tax year in 2026.
The law was officially signed by President Donald Trump on July 4, 2025, during a White House Independence Day event, following its narrow passage in the Senate just days earlier. Vice President JD Vance cast the tie-breaking vote on July 1 to secure Senate approval. The White House projects that millions of blue-collar workers will benefit, as the legislation is designed to reward those putting in extra hours.
It’s important to note the following:
- Not all overtime arrangements count. Only federally mandated overtime (FLSA covered) is included. Contractual or state-mandated overtime may not qualify unless it also meets the FLSA standard.
- Salaried employees who are exempt from FLSA overtime rules will not benefit.
- Employers are required to report overtime earnings clearly on W-2 forms beginning with the 2025 tax year, though transition assistance and flexibility will be offered by the IRS for initial filings.
- The provision is currently not permanent and is set to expire after the 2028 tax year, unless renewed by Congress.
Table: No Tax on Overtime Fast Facts
Filing and Compliance: What Employees and Employers Should Know
✅ For Employees: Key Points
- Tax Savings Begin in 2026
- The overtime tax deduction can significantly reduce your federal tax bill if you work qualifying overtime hours.
- No Special Forms Required
- It’s an above-the-line deduction, so you can claim it even if you take the standard deduction—no need to itemize.
- Check Your Tax Return Details
- Ensure your Social Security number is accurately listed on your tax return.
- Review Your W-2 Carefully
- New designated box on the W-2 will report qualifying overtime income.
- Verify this matches your actual earnings.
- Keep Accurate Records
- Maintain:
- Pay stubs
- Timesheets
- Overtime logs or approvals
- Maintain:
- Address Discrepancies Immediately
- If your W-2 doesn’t match your records:
- Contact your employer for corrections.
- Seek help from a tax professional, especially if you have multiple jobs or irregular arrangements.
- If your W-2 doesn’t match your records:
✅ For Employers: Key Points
Monitor IRS announcements to stay compliant as rules and clarifications evolve.
FLSA-Defined Overtime Is Required
Only non-exempt employees working more than 40 hours/week at 1.5x pay qualify.
Update Payroll Systems
Must separately track qualifying FLSA overtime from other bonus or premium pay.
Ensure systems can generate new W-2 categories for the 2025 tax year.
IRS Flexibility for 2025 Transition
Employers are allowed reasonable compliance efforts and streamlined correction options during initial implementation.
Work with Payroll Providers
Ensure full compatibility with IRS and FLSA rules.
Test and adjust systems ahead of year-end deadlines.
Train HR and Payroll Teams
Educate staff on:
New classification rules
Reporting practices
Overtime eligibility standards
Establish Quality Control
Create review procedures to catch errors early and maintain accuracy in employee reporting.
Consider Multi-State Compliance
States may have different overtime rules.
Coordinate reporting standards across jurisdictions.
Stay Updated on IRS Guidance
What This Means for Working Americans
With the start of the no tax on overtime provision from the beginning of 2025, eligible workers now have an extra incentive to take on additional hours. Although this doesn’t fully exempt all overtime pay from every form of taxation, it provides a valuable break for middle-income earners during a period of high economic demand for essential work.
Are you eligible, or has your workplace already started benefiting from the new law? Share your experience or ask a question below and join the conversation with others navigating this big change!