Will everyone be eligible for no tax on overtime filing taxes this year?
1. What the law actually does in plain terms
The One Big Beautiful Bill Act created a federal deduction that lets eligible individuals deduct the portion of overtime pay that exceeds their regular rate of pay — typically the “half” premium of time‑and‑a‑half — for tax years beginning in 2025 through 2028 unless Congress extends it [1] [4]; the IRS and tax firms characterize this as a deduction (not a payroll‑tax exemption) that reduces federal income tax liability on that qualified overtime compensation [1] [5].
2. Who qualifies and who does not
Eligibility is limited: the deduction applies to employees who receive “qualified overtime compensation,” generally non‑exempt workers covered by the Fair Labor Standards Act (FLSA) who are paid overtime and receive a W‑2 or certain 1099s; salaried exempt employees who are not entitled to overtime under FLSA do not qualify [1] [6] [2]. The provision also includes income‑based phaseouts and caps — common public guidance lists caps of roughly $12,500 for single filers and $25,000 for joint filers and phaseouts beginning at specified MAGI thresholds — meaning high earners will lose or see reduced benefit [2] [4] [7].
3. Reporting and the transition year: why not everyone can claim it yet
Because existing tax forms initially lacked a designated line for qualified overtime, the IRS provided transition relief for tax year 2025: employers are encouraged to provide overtime totals by a “reasonable method” and won’t face penalties for incomplete W‑2 reporting in 2025, but new W‑2 reporting requirements and specific Box 12 codes (draft code “TT”) kick in for the 2026 tax year and beyond — so getting the deduction onto a return depends on employers’ payroll systems and year‑end reporting [5] [8] [3] [6].
4. Limits, taxes that still apply, and state variation
The federal deduction does not eliminate payroll taxes — Social Security and Medicare withholdings still apply — and it may not affect state and local income taxes depending on jurisdiction; multiple sources emphasize that the new rule is a federal income tax deduction up to statutory caps and subject to phaseouts, not a wholesale exemption from all forms of taxation [5] [2] [7]. States with their own overtime rules or different taxable income definitions may treat the deduction differently, and some complexities arise for multi‑rate or salaried non‑exempt scenarios [9] [10].
5. Practical implications for workers and employers
Many workers who regularly log overtime will be eligible to claim at least part of the deduction once employers report qualified overtime, but claiming it requires accurate employer tracking and may involve amended forms or supplemental statements for 2025 returns; employers face a compliance burden to change payroll systems, and transition relief for 2025 is temporary — penalties for missing required reporting are expected to apply beginning with 2026 [5] [6] [8].
6. Where the uncertainties and debates remain
Key uncertainties include the temporary nature of the benefit (sunset currently scheduled after 2028 in many summaries), competing or variant bills that propose different caps or percentages, and how states will conform; legal and payroll advisers warn that complex pay arrangements (multiple rates, bonuses, gig work treated by 1099s) will complicate who actually reaps the benefit [11] [7] [9]. Reporting from tax preparers and legal firms highlights that guidance and draft forms may change, so final implementation could shift details employers and filers rely on today [3] [8].
7. Bottom line answer
Not everyone will be eligible this year; only taxpayers who received “qualified overtime compensation” under the FLSA, meet the non‑exempt and income‑limit requirements, and are able to document the overtime (often via employer reporting or a reasonable alternative in 2025) can claim the deduction — and even then it’s capped, phases out for higher incomes, and does not eliminate payroll or necessarily state taxes [1] [2] [5].