The new 2025 Trump tax law includes provisions for “No Tax on Tips” and “No Tax on Overtime.” I covered “No Tax on Tips” in a different post. Let’s look into “No Tax on Overtime” now. If you earn both tips and overtime pay, you can benefit from both!
Non-Exempt W-2 Employees
In general, only W-2 employees are entitled to overtime pay. Independent contractors paid by a 1099 don’t qualify for overtime. Nor do self-employed business owners.
Among W-2 employees, for the most part, only hourly (“non-exempt”) employees are entitled to overtime pay. Most salaried (“exempt”) employees don’t receive overtime pay, regardless of the number of hours they work in a week.
Some salaried employees aren’t paid high enough to qualify as exempt employees. They’re still classified as non-exempt and entitled to overtime pay.
Exempt and non-exempt refer to the requirements mandated by the Fair Labor Standards Act of 1938. Being exempt means that the employer isn’t required to follow those requirements in its employment relationship with you. Your employer will tell you whether you’re exempt or non-exempt if you’re not sure.
If you’re currently a salaried exempt employee, it’s unlikely that your employer is willing to re-classify you as non-exempt and give you the advantage of “No Tax on Overtime.” Having you as a non-exempt employee would subject the employer to many requirements from the Fair Labor Standards Act. An employer wants to find every reason to make an employee exempt from those requirements.
Not What You Think
The Fair Labor Standards Act requires that overtime must be paid at least 1-1/2 times the regular hourly wage (“time-and-a-half”). Some state laws and union contracts require double time in some scenarios. Some employers voluntarily pay double time for holidays.
Suppose your regular hourly rate is $30/hour and you’re paid $45/hour for overtime. You receive $450 in gross overtime pay when you work 10 overtime hours in a week. You would think that “No Tax on Overtime” means you don’t pay tax on that $450, but that’s not how it works.
“No Tax on Overtime” covers only the pay premium over and above your regular hourly rate. The “No Tax” part applies to $150 out of the $450 gross overtime pay for 10 hours. You still pay taxes as usual on $300 earned at your regular $30/hour rate for those hours.
As a result, if your overtime hours are paid time-and-a-half, you’ll have no tax on only 1/3 of your gross overtime pay. If you’re paid double time, you’ll have no tax on 1/2 of the gross overtime pay.
Temporary Window
As is the case with several other provisions in the 2025 Trump tax law affecting individual taxpayers, “No Tax on Overtime” is only effective between 2025 and 2028 (inclusive). It expires at the end of 2028.
Tax Withholding
“No Tax” refers only to the federal income tax. It doesn’t change the Social Security and Medicare taxes withheld from your paychecks. It doesn’t reduce your state taxes.
The IRS will make changes to payroll tax withholding to treat overtime pay differently, but the changes won’t start until 2026. You won’t see any change in your paychecks in 2025 unless you change your tax withholding with your employer.
Tax Deduction
The IRS will add a box to the W-2 form for employers to break out the overtime premium. Until then, your employer can report the overtime pay to you outside the W-2. You will have a new tax deduction for your overtime pay premium. You’ll use it to reconcile with your tax withholding. You’ll get a higher tax refund if the tax withholding was too high.
This deduction is available whether you take the standard deduction or itemize your deductions. However, it doesn’t lower your AGI. 100% of your overtime pay will still be included in your AGI. It doesn’t make it easier for you to qualify for other tax benefits, such as the Child Tax Credit.
Dollar Cap
You may not be allowed to deduct all your overtime pay premiums. There’s a $12,500 cap ($25,000 for married filing jointly). You don’t get this tax deduction if you’re married filing separately.
Because most people are paid time-and-a-half for overtime, a $12,500 cap for the premium portion of the overtime pay translates into $25,000 at the regular hourly rate for the overtime hours. If your regular hourly rate is $25/hour, it means you can work 1,000 overtime hours in a year before you hit the cap. That’s like working 60 hours per week every week of the year.
If you’re married filing jointly, and only one of you has overtime pay, your cap is twice as high as that for a single person.
Income Phaseout
The dollar cap drops slowly as your income increases above $150,000 ($300,000 for married filing jointly). It decreases by $100 for every $1,000 of income above the threshold. The cap drops to zero when your income reaches $275,000 ($550,000 for married filing jointly).
Most people won’t be affected by the income phaseout because both the dollar cap and the phaseout threshold are set sufficiently high.
Both Overtime and Tips
“No Tax on Overtime” and “No Tax on Tips” are independent of each other. You qualify for both if you receive both overtime pay and tips. If you’re 65 or older, you also qualify for the Senior Deduction. If you take the standard deduction and you donate cash to charities, you’ll qualify for the charity donation deduction starting in 2026.
Calculator
I made a calculator to help you estimate your federal income tax before and after “No Tax on Overtime” and “No Tax on Tips.” Use the calculator to see how much you’ll benefit. Leave the tips field at 0 if you don’t receive tips. [Email readers: The calculator doesn’t work in emails. Please go to the website to try the calculator.]
If you’re married filing jointly, please include income from both of you.
The calculator estimates taxes using basic assumptions. It assumes your overtime hours are paid time-and-a-half. Your taxes may be different if you have a more complex scenario.
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You’ll find more deep dives on recent changes from the 2025 Trump tax law in the full OBBBA series.
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