How does the no tax on overtime work?
Executive summary
The One Big Beautiful Bill Act enacted a temporary federal tax break that lets many non‑exempt workers deduct “qualified overtime compensation” from income for tax years 2025–2028; the deduction generally covers the overtime premium (the “half” of time‑and‑a‑half) and is retroactive to Jan. 1, 2025 [1] [2] [3]. Employers must begin separate reporting in 2026 (with transition relief for 2025), and the IRS issued guidance and examples to help taxpayers determine qualifying amounts [1] [4] [3].
1. What “no tax on overtime” actually does — the narrow mechanics
The law does not abolish payroll taxes or Social Security/Medicare withholding; it creates an income‑tax deduction for “qualified overtime compensation” received in tax years 2025 through 2028, generally the portion of overtime pay that exceeds the worker’s regular rate (commonly the half of “time‑and‑a‑half”) required under the Fair Labor Standards Act [1] [3]. The deduction can be claimed by eligible employees (including non‑exempt W‑2 workers) and applies whether taxpayers itemize or take the standard deduction [2] [5].
2. Who is likely eligible and what counts as qualified overtime
Eligibility centers on being a non‑exempt employee paid overtime under FLSA rules; “qualified overtime compensation” is the excess pay above the regular rate that’s reported to the worker on Form W‑2, Form 1099, or other specified statements [1] [3]. Guidance from IRS examples shows that an employer’s payroll statement listing an “overtime premium” can be used to establish the deductible amount [3]. Available sources do not mention every edge case (for example, salaried misclassified workers), so consult the IRS examples and your pay records [3].
3. Reporting changes and the transition year confusion
Employers are required to report qualified overtime separately on W‑2s beginning in 2026, but the IRS provided transition relief for 2025: W‑2s and 1099s for 2025 likely remain unchanged and taxpayers must rely on pay stubs and employer statements (or IRS Notice 2025‑69) to compute their deduction for 2025 [1] [3] [4]. The government added a one‑year safe harbor for employers to average overtime hours for 2025 if needed to ease implementation [6]. Journalists and tax preparers warn that preparing 2025 returns will be more work because many filers will need to assemble records if employers cannot yet provide separate reporting [7].
4. Dollar limits, income caps, and duration
Sources indicate limits on how much may be deductible: many summaries report monetary caps (for example reporting of up to $12,500 for individuals and $25,000 for joint filers appears in practitioner summaries), and some legislative summaries show variants of percentage caps in alternative bills — but the IRS guidance emphasizes the overtime premium itself as the deductible item for 2025–2028 [4] [8] [3]. The underlying law is temporary, covering tax years beginning after Dec. 31, 2024, and ending before Jan. 1, 2029 [9].
5. Competing perspectives and fiscal tradeoffs
Proponents frame the change as a targeted benefit for workers who rely on overtime pay and as a labor‑friendly provision in a large tax package [10]. Critics and budget analysts note the broader bill increases deficits substantially (Congressional Budget Office projection cited in analysis of the bill), and tax policy observers flag administrative complexity and the burden placed on employers and payroll systems [10] [7]. The IRS and Treasury expressly acknowledged administrative difficulty for 2025 and offered relief to reduce employer penalty exposure [1] [3].
6. Practical steps for workers and employers this filing season
Workers should start gathering 2025 pay stubs, payroll statements and any employer communications showing overtime premiums, because W‑2s for 2025 may not separately show qualified overtime [7] [3]. Employers need accurate overtime tracking, plan for new W‑2 reporting in 2026 (Box 12 code “TT” was drafted for reporting), and should avoid giving tax advice to employees [11] [4]. The IRS published Notice 2025‑69 and examples on Nov. 21, 2025 to help compute deductions without separate employer reporting [3].
Limitations: my reporting here relies only on the sources you provided; for case‑specific advice (e.g., unusual pay arrangements, state tax treatment, or how payroll withholding should be adjusted) consult a tax professional or the IRS materials cited [3] [12].