CPE

What tax professionals need to know about the No Tax on Overtime deduction

August 27, 2025

7 min read

Closeup of a laptop - the screen says "weekly timecard" with a spreadsheet on it. This represents hourly workers and the no tax on overtime provision

Marketing Manager, Content

When the One Big Beautiful Bill Act was signed into law, one of the provisions that got the most attention was "No Tax on Overtime." Like the "No Tax on Tips" provision, the No Tax on Overtime is not as simple as the name would suggest, so tax professionals need to understand the details to make sure your clients are getting the full benefits. Keep reading to learn about what the provision is, who is eligible, and best practices to keep in mind.

What does No Tax on Overtime mean?

No Tax on Overtime is a provision within the One Big Beautiful Bill Act that allows employees to deduct qualifying overtime pay on their federal tax return. Payroll taxes on an employee's paycheck will still be deducted, but when it's time to prepare their federal tax return, single filers can deduct up to $12,500 in qualified overtime pay from their taxable income and taxpayers who are married and filing jointly can deduct up to $25,000.

Am I eligible for the No Tax on Overtime deduction?

To receive this deduction, filers must provide a valid Social Security number and file either single or married filing jointly. Additional criteria includes:

Employment type

Only W-2 employees with a non-exempt classification under the Fair Labor Standards Act qualify for the No Tax on Overtime deduction. Independent contractors do not qualify for this deduction.

Income thresholds

The full deduction is available to single filers earning below $150,000 and married filing jointly below $300,000. Those who earn above those thresholds will see the benefit phase out.

Overtime standards

The overtime must meet federal standards for qualified overtime compensation, which is typically 1.5 times the hourly wage ("time and a half") for any time worked over 40 hours in a week. The overtime must also be reported separately by the employer on the employee's W-2 form.

Only the overtime premium portion is considered qualified overtime compensation, and can be deducted. For example, if an employee earns $18 per hour and earns $27 per hour in overtime, only the $9 per hour premium is considered qualified overtime compensation.

Limits on the deduction

Deduction cap: Up to $12,500 for single filers or $25,000 for married couples filing jointly
Phase out: Begins at $150,000 for single filers or $300,000 for married couples filing
Applies only to federal qualified overtime compensation and can't include shift differentials or holiday pay premiums

When does the No Tax on Overtime deduction begin and end?

The provision applies to overtime pay that employees received beginning January 1, 2025, and the deduction will be available for qualified taxpayers beginning in 2026 for the 2025 tax year. Employers are required to separately track and report qualifying overtime on payroll forms, including W-2s.

This deduction is temporary, and is currently set to sundown on December 31, 2028, unless extended by future legislation. After the deduction expires, eligible overtime pay is subject to the standard income tax rules.

Best practices for tax professionals

If you have clients who may be eligible for the No Tax on Overtime deduction, consider adopting these best practices to ensure accuracy and compliance.

Verify eligiblity, including employee classification and income thresholds
Discuss record-keeping with your clients, including keeping pay stubs and other statements of all overtime hours and pay they received
Review year-end tax documents for separately stated qualified overtime compensation to make sure employers are complying with new reporting requirements
Remember that this is an "above-the-line" deduction clients can claim, regardless of whether they itemize or take the standard deduction
Encourage clients to speak with their employers or payroll departments to confirm compliant overtime reporting
Reach out to your clients to summarize the new deduction and its requirements
Anticipate IRS guidance and transition rules

Learn more with CPE courses from Becker

If you'd like to learn more about the One Big Beautiful Bill and other tax issues while meeting your continuing education requirements, consider these CPE courses from Becker:

Becker offers over 700 on-demand courses, 1,000 webcasts annual webcasts, and weekly CPE podcasts to help you stay on top of the latest regulatory changes and build valuable skills. With a Prime CPE subscription, you can earn unlimited credits at incredible savings!