What’s Happening With Taxes on Overtime Pay?

Tax cuts are in the news again, and one of the most closely watched proposals is President Donald Trump’s push to make overtime pay tax-free for workers who put in more than 40 hours a week.

The idea, which gained traction alongside the “no tax on tips” pledge during last year’s presidential campaign, continues to spark debate.

"We will end all taxes on overtime,” Trump told supporters.

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Trump has argued that eliminating the tax on overtime pay would incentivize work, benefit hardworking Americans, and make it easier for companies to attract employees.

“That gives people more of an incentive to work. It gives the companies a lot. It's a lot easier to get the people,” Trump added.

The ongoing debate has left many workers wondering: Is tax-free overtime a real possibility, or just another campaign promise? And what would it mean for their paychecks if it does become law?

Here’s more to know about where the proposal stands and what could change in the months ahead, beginning with how overtime pay is taxed now.

How overtime pay is taxed in 2025

It's important to note that as of May 2025, no law has been enacted to make overtime pay tax-free at the federal level.

Earlier this year, the U.S. House of Representatives passed a budget blueprint and, more recently, passed legislation containing a provision for tax-free overtime. (More on that below.)

However, to become law, the measure will have to be incorporated into a reconciliation bill, approved by the House and U.S. Senate, and eventually signed by President Trump.

Trump calls the effort "one big beautiful bill" that the administration hopes will be enacted by July 4.

So for now, overtime pay is taxed like regular wages, subject to federal and state income taxes and Social Security and Medicare withholding.

Key Points:

• The Fair Labor Standards Act (FLSA) mandates that eligible workers receive at least 1.5 times their standard pay rate for hours worked beyond the typical 40-hour workweek.
• Overtime pay is subject to federal income tax, and Social Security and Medicare taxes.
• The Department of Labor under the Biden administration recently enacted a new overtime rule that was expected to help millions of workers. (More on that below.)

In recent years, Gallup polling reveals a majority of workers regularly clock more than 40 hours a week.

Meanwhile, other data show that nearly 80% of voters support some form of overtime pay protection for all workers. (That support was reportedly strong across political party lines.)

Is overtime pay really becoming tax-free?

The "no tax on overtime" proposal is part of a series of tax cut promises Trump made during his presidential campaign. As Kiplinger has reported, he previously suggested eliminating taxes on tips and ending the tax on Social Security benefits.

Some see these proposals, criticized by economists and policymakers, as ways to appeal to so-called working-class voters.

While the idea of tax-free overtime may sound appealing, critics worry.

• There's the potentially significant loss of federal tax revenue (on the low end, depending on what income is exempted, an estimated $145 billion over ten years, according to the Tax Foundation)
• Plus, the possibility of employers relying more on overtime instead of hiring additional workers

Similar concerns have been raised about the no-tax-on-tips proposal (the Tax Foundation estimates a cost, on the low side, of $107 billion over ten years).

When does no tax on overtime start?

As mentioned, the U.S. Congress approved a budget blueprint earlier this year that sets the stage for future tax legislation. But that resolution doesn't enact specific tax policies, as both chambers must eventually agree on a single way forward.

Update: However, on May 22, the House GOP passed its version of a mega reconciliation bill that includes a provision that would temporarily eliminate federal income tax on overtime pay through the end of 2028.

This means that, if the bill is approved, workers would not owe federal income tax on the overtime portion of their wages for tax year 2025 and up to and including 2028.

Remember: Until both chambers pass a final bill and President Trump signs it into law, overtime pay is fully taxable on your federal return.

Overtime pay tax deduction?

Interestingly, Sens. Roger Marshall (R-Kan.) and Tommy Tuberville (R-Ala.) introduced the Overtime Wages Tax Relief Act on May 6, 2025.

• The bill would allow workers to deduct up to $10,000 in overtime pay from their taxable income
• Up to $20,000 for married couples
• The deduction would gradually phase out for higher earners

The bill's advocates say it could save some eligible taxpayers up to $4,400 in annual tax savings. But it's important to note that actual savings would depend on a taxpayer's specific income, tax bracket, and how much overtime they worked.

Some estimates are that it could cost $1.3 trillion over ten years.

However, for the proposal to become law, it must pass both the House and Senate and be signed by the president. Supporters hope to include it in a larger budget package that could be advanced through the reconciliation process. That would allow it to pass the Senate with a simple majority.

But with the House provision to eliminate taxes on overtime pay for three years in play, it's hard to say which approach will win the day.

Project 2025 overtime pay

It’s worth noting that policy proposals in Project 2025, widely seen as a playbook for this Republican administration, oppose expanding overtime protections.

For example, the conservative blueprint states, “Congress should provide flexibility to employers and employees to calculate the overtime period over a longer number of weeks.”

The Center for American Progress has said that approach “would put more power in the hands of employers to exploit employees, which is seemingly part of Project 2025’s larger goal: pad corporate bottom lines at the expense of workers.”

During the presidential campaign, Trump tried to distance himself from the playbook by saying, "I have nothing to do with Project 2025."

Now that Trump is President, early indications are that the playbook largely aligns with Trump's policy agenda and executive actions thus far.

For more information, see Kiplinger's Project 2025 Tax Overhaul Blueprint report.

New overtime rules 2025?

This campaign pledge and questions about how Trump will handle overtime come as many in the U.S. deal with the varied impacts of inflation, including worry over wages and income not keeping pace.

The Biden administration had enacted a rule that would have raised the minimum salary requirement for overtime pay eligibility, The move was designed to boost wages for workers with lower incomes.

• The new Department of Labor rule was scheduled to take effect in two stages over the next year.
• The FLSA salary threshold first increased in July to $43,888 annually ($844 per week), up from the previous $35,568 ($684 per week).
• Future threshold increases would occur in later years, beginning as soon as 2025. For instance, on January 1, 2025, the threshold would increase to $58,656 a year ($1,128 per week).
• That change was expected to extend overtime pay protection to millions of additional workers who weren’t previously eligible.

With some exceptions, most employers would be required to follow the overtime rules, at least regarding the July 1, 2024 changes.

Note: The Trump administration hasn't announced a new rule for overtime eligibility, so employers will likely follow the 2019 rules.

Texas overtime ruling: What it means for you

But what happened in Texas? Texas sued the Department of Labor over the new overtime pay rule, which, as mentioned, would have raised the minimum salary threshold for overtime exemption to $58,656 as of January 1, 2025.

Texas argued that the federal government (DOL) overstepped its authority by focusing on salary rather than job duties.

A federal judge in the Eastern District of Texas initially issued a preliminary injunction blocking enforcement of the rule against the state of Texas as an employer. However, as of late November, a Texas federal court struck down the new DOL overtime rule.

As a result, the new overtime rule's implementation is blocked nationwide and the salary thresholds have reverted to the 2019 levels. ($684 per week ($35,568 a year) for most employees and $107,432 for highly compensated employees.)

Stay tuned. It's hard to say whether DOL will appeal the ruling, given that the new administration is in the White House, making significant changes.

Overtime tax in 2025: Bottom line

Whatever happens, any new economic policies like the no overtime tax proposal will likely face scrutiny in the coming months. That's because Congress has to address expiring tax provisions in the Tax Cuts and Jobs Act (TCJA), initially enacted in Trump's first term in the White House. Their current goal is to do so by July 4.

Also, remember that any President has to go through a complex legislative process to enact new tax policy, and given the slim majority in the Republican-led House of Representatives, that’s no small feat.

In the meantime, several states are also considering proposals to end state taxes on tips. To learn more, see our report: Could Your State End Tax on Overtime This Year?

This story has been updated to provide information on the proposed Overtime Wages Tax Relief Act and the House GOP proposal to temporarily eliminate overtime taxes.

Related

• New Alabama Overtime Law
• What Trump Isn't Telling You About His 2025 Tax Plans
• New 'No Tax on Tips' Bill Approved: What to Know Now