Overtime Pay Tax Deduction: What Workers Need to Know for 2025
One Big Beautiful Bill Act · NEW FOR 2025
The OBBBA creates a federal income tax deduction for overtime premium pay starting in 2025. Here's how it works, who qualifies, and how to calculate your deduction.
The One Big Beautiful Bill Act introduced a federal income tax deduction for overtime premium pay beginning in tax year 2025. If you received overtime pay from your employer in 2025, a portion of those earnings may now be deductible, reducing your federal income tax bill.
What Is the Overtime Premium?
The overtime premium is the additional pay above your regular hourly rate for hours worked over 40 per week. Under the Fair Labor Standards Act, most non-exempt employees must be paid 1.5 times their regular rate for overtime hours. The OBBBA deduction covers the premium portion — the extra 0.5x pay — not the entire overtime paycheck.
Example: How to Calculate the Deduction
Say you earn $20/hour and work 10 overtime hours in a week. Your overtime pay is $300 (10 hours × $30). Your regular pay for those same hours would have been $200 (10 hours × $20). The overtime premium — the deductible amount — is $100 ($300 - $200). You continue to pay income tax on the $200 base pay for those hours.
Who Qualifies?
The deduction applies to employees who receive overtime pay subject to the Fair Labor Standards Act or similar state laws. It does not apply to:
• Salaried exempt employees whose overtime is not governed by FLSA
• Self-employed individuals or independent contractors
• Business owners who pay themselves overtime
Most hourly workers — manufacturing, retail, healthcare support, food service, logistics — should qualify.
Income Limits
Like the tip deduction, the overtime deduction phases out at higher income levels. High earners may see a reduced or eliminated benefit. The deduction is targeted at middle-income hourly workers.
How Will This Show on Your W-2?
Employers may report qualifying overtime premium pay separately on Form W-2, or the IRS may provide worksheets for employees to calculate the deductible amount themselves. Guidance from the IRS is expected before the 2026 filing season.
Frequently Asked Questions
Does the deduction apply to all my overtime pay or just the premium?
Just the premium — the extra 0.5x pay above your regular rate. The base pay portion of overtime hours is still taxable.
I'm a salaried employee who works overtime. Do I qualify?
Generally not, unless you are a salaried non-exempt employee who is specifically paid overtime under FLSA. Salaried exempt employees do not qualify.
Can self-employed people deduct overtime?
No. The deduction is for employees receiving FLSA-governed overtime pay, not for self-employed individuals.
Do I need to keep records of my overtime hours?
Your employer should track and report your overtime. Keeping copies of your pay stubs showing regular vs. overtime hours is good practice and helpful in case of an audit.