A new tax break aimed at overtime earnings, introduced under the One Big Beautiful Bill Act (OBBBA), has taken effect, promising financial relief for millions of workers. This legislation, enacted on July 4, 2025, provides a temporary deduction for overtime pay, designed to benefit around 143 million individuals.
While it may sound appealing that there will be no tax on overtime, it’s essential to clarify that the deduction doesn’t completely eliminate taxes on overtime income. Instead, workers qualifying for this deduction may find more money left in their pockets come tax time.
The deduction applies to pay exceeding the employee’s regular wage, specifically for overtime hours worked under section 7 of the Fair Labor Standards Act (FLSA). However, deductions are capped, with a maximum of $12,500 available for single filers and $25,000 for those filing jointly. The eligibility for this deduction phases out based on taxable income, starting at $150,000 for single filers and $300,000 for joint filers. Once incomes exceed $275,000 for single filers and $550,000 for joint filers, the deduction can no longer be claimed.
For employee classifications, non-exempt workers, particularly hourly employees, will be able to take advantage of this deduction, whereas most salaried employees typically do not qualify. It’s important for all potential claimants to be aware that while the federal tax deduction is available, state taxes and certain payroll taxes may still apply.
Navigating the eligibility criteria and determining the correct deduction can be intricate. The Department of Labor provides useful information regarding overtime requirements. To claim the deduction correctly, employees must keep accurate records of their overtime hours worked. Although employers are not mandated to account for overtime specifically in the 2025 tax year, some may choose to do so. For record-keeping, overtime earnings may be listed on various tax forms like the Form W-2, Form 1099-NEC, or Form 1099-MISC.
Calculating what qualifies as deductible overtime requires some basic math. For example, if a worker earned $15,000 in total overtime pay with a time-and-a-half rate, they would only be eligible to deduct $5,000 after dividing by three. Conversely, for workers being paid at double-time, the calculation changes, and a $20,000 overtime payout would yield a deductible amount of $5,000.
As a transitional year, 2025 may have some flexibility in documentation, but by tax year 2026, employers will need to provide the total amount of qualified overtime explicitly on a Form W-2 or Form 1099. This means that claiming the new deduction for overtime will require careful attention to the specifics of tax filings.
The process to claim this deduction isn’t automatic; taxpayers must fill out a Schedule 1-A (Form 1040) to receive their benefit. This addition must be submitted alongside other tax forms, and while it consists of two pages, only relevant sections need to be filled out.
Overall, while the OBBBA presents an attractive opportunity for those eligible, workers should educate themselves about the necessary steps to claim their deductions and remain vigilant about their specific income levels to maximize their benefits.
