The 2025 Big Beautiful Bill law put into effect a "No Tax on Overtime" provision for the Tax Years 2025-2028. This provision allows the Taxpayer to Deduct Overtime wages paid from their Gross Wages paid if they meet certain criteria.
The deductible Overtime wages are determined by subtracting the Regular Hourly rate from the Overtime Hourly rate and then multiplying the result by the Total Hours Worked. This deduction only applies to Federal Income Tax.
Example:
Regular Hourly Rate: $10
Overtime Hourly Rate: $15
Total Overtime Hours Worked = 100
Deductible Overtime Amount = $15-$10 = $5 x 100 = $500
The “No Tax on Overtime” law does not mean overtime pay is exempt from withholding. It provides a deduction at tax filing, potentially lowering federal income tax liability, but employers will continue to withhold taxes from each paycheck as usual. To benefit from the deduction, the taxpayer must claim it on their federal tax return.
The Deductible Overtime wages will be reflected on the Employee's W-2 Federal Tax Form in Box 12 with the code "TT".
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