What “No Tax on Overtime” Truly Means

"What No Tax On Overtime" means under The Big Beautiful Bill and What You Need To Know: 

The law establishes a deduction for “qualified overtime compensation” for tax years 2025 through 2028. 

What is “qualified overtime compensation” (QOC)?

This is overtime pay above your regular rate - i.e. the extra “half” in “time‑and‑a‑half” that your employer must pay under the Fair Labor Standards Act (FLSA). So only the excess over your normal rate for overtime hours is eligible.

Amount you can deduct:
  • Single filers: up to $12,500 per year
  • Married filing jointly: up to $25,000 per year
Income phase‑out:

The benefit starts to phase out when modified adjusted gross income (MAGI) exceeds $150,000 for single filers, or $300,000 for married filing jointly. Above those thresholds, your deduction is reduced.

Who is eligible?
  • Must receive overtime compensation required by the FLSA.
  • The overtime portion must be separately reported on your W‑2 or 1099 (or other required statement). Employers will need to include a line showing your qualified overtime compensation.
  • Must file a return with a valid Social Security number, and married couples must file jointly to claim the deduction.
What the deduction does not do:

It doesn’t affect payroll taxes (Social Security, Medicare) or state/local taxes; those still apply.
It doesn’t make all overtime pay tax‑free. Only the excess overtime part (over the regular rate) qualifies.

Duration:

The provision lasts through December 31, 2028. After that, unless extended, it will expire. 

What This Means in Practice

Here are some of the advantages, plus things to watch out for:
  • If you regularly work overtime, you’ll be able to reduce your federal taxable income by deducting the overtime premium portion. That lowers your tax liability.
  • The fact you can claim this even if you take the standard deduction (not itemizing) is helpful.
  • For many moderate-income earners who do overtime, this could give a noticeable tax cut.
Limitations / Things to Know:
  • If your income is above the phase‑out threshold (MAGI over $150,000 single / $300,000 joint), the deduction shrinks and eventually phases out. So high earners may get little or no benefit.
  • Since withholding tables for federal income tax probably won’t reflect the deduction in 2025, you might not immediately see more take-home pay. Benefits show up when you file your return.
  • Employers must report the overtime separately; if that isn’t done correctly, you may not be able to take full advantage.
  • State tax treatment may differ. Some states may still tax the full overtime pay. The deduction is a federal income tax change.