No Tax on Overtime Premium Pay: What the New Law Means for You (2025–2028)

Starting in 2025, a new tax rule will temporarily change the way overtime pay is taxed—and it could save eligible workers money.

What Changed?

Under the One Big Beautiful Bill Act, the “premium” portion of overtime pay (the extra half you earn for time-and-a-half work) is now deductible from federal income tax between 2025 and 2028.

Example:

If your normal wage is $20/hour, overtime is paid at $30/hour. The $10 difference is the premium portion. Only that $10 per overtime hour is deductible.

Limits:

• Up to $12,500 for single filers

• Up to $25,000 for married filing jointly

• Phase-out begins at $150,000 income (single) or $300,000 (married).

Who Qualifies?

• W-2 employees with overtime subject to the Fair Labor Standards Act (FLSA)

• Must receive employer documentation (such as W-2 notes or a payroll statement) identifying overtime premium pay

⚠️ Independent contractors (1099 workers) do not qualify.

What Doesn’t Change:

This deduction only applies to federal income tax. You’ll still owe Social Security, Medicare, and any state or local taxes on your overtime pay.

Why It Matters

This provision helps reduce taxable income for workers who rely on overtime. But because rules are specific, it’s important to review eligibility and ensure your employer reports premium pay correctly. Staying updated on new tax rules can feel overwhelming, but knowing the details now will help you make the most of your hard work later. The overtime premium deduction is a great opportunity for many employees to lower their taxable income and keep more of their paycheck.

💡 Have questions about how this change may apply to you? Chavez Tax Services is here to guide you with clear answers and reliable tax strategies.