What’s Happening With Taxes on Overtime Pay?

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

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 said.

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The idea, which gained traction alongside the “no tax on tips” pledge during last year’s presidential campaign, is (with several limits) now part of the so-called One Big Beautiful Bill Act (OBBBA), major GOP legislation enacted July 4, 2025.

With the OBBBA signed into law, questions for many workers center on what the changes are and what they mean for their paychecks going forward.

Here’s more to know.

How overtime pay is taxed in 2025

As of July 4, 2025, the One Big Beautiful Bill Act allows workers to deduct up to $12,500 of overtime pay ($25,000 for joint filers) from their federal taxable income for tax years 2025 through 2028.

It's important to note that Trump's new tax bill doesn't make all overtime pay fully exempt from federal income tax.

Previously, overtime pay was taxed like regular wages, subject to federal and state income taxes and Social Security and Medicare withholding.

Now, under the OBBBA, while payroll and state/local taxes still apply, eligible workers won't owe federal tax on the deductible portion of their overtime pay each year during the three-year period.

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 normally subject to federal income tax, and Social Security and Medicare taxes.
• Now, under the OBBBA, eligible individuals can deduct up to $12,500 of overtime earnings from their taxable income each year from the 2025 through 2028 tax years.
• You won't have to itemize deductions to claim this tax break, and the deduction phases out for higher earners, starting at $150,000 in income for single ($300,000 for joint filers).

*Remember: Under the OBBBA, only the deductible portion of federal income tax on overtime pay is eliminated for 2025 through 2028. Payroll taxes and state/local income taxes will still apply.

Also, since this tax break is different than a tax credit or total exemption, your overall tax savings, if any, will likely depend on your marginal tax rate.

Is overtime tax-free now?

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.

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

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.)

So, some lawmakers saw the proposals, criticized by many economists and policymakers, as ways to appeal to so-called "working-class" voters.

But keep in mind that Trump's "big, beautiful bill" doesn't make all overtime pay fully exempt from federal income tax, and 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 "no-tax-on-tips." (The Tax Foundation estimates a cost, on the low side, of $107 billion over ten years).

When does no tax on overtime start?

With the OBBBA now signed into law, the federal income tax deduction for overtime pay will begin this year (2025 tax year) and continue through 2028.

Supporters of the bill say eligible workers will see the change reflected in their 2025 tax return, filed in 2026.

However, keep in mind that, as mentioned above, the deduction is limited in terms of time, amount, and income.

Other new overtime rules for 2025?

Questions about how Trump is dealing with overtime pay 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

What happened in Texas? Texas sued the Department of Labor over the Biden overtime pay eligibility 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 second Trump administration is in the White House, making significant changes.

Overtime tax in 2025: Bottom line

The One Big Beautiful Bill Act signed into law on July 4, 2025, now provides an above-the-line deduction for overtime pay. This isn't a full tax exemption, but is seen by advocates as a way to provide some tax relief to eligible workers who put in more than 40 hours per week.

The deduction of up to $12,500 per individual phases out at higher incomes and will only be available for three years.

At the same time, 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 One Big Beautiful Bill Act.

Related

• New Alabama Overtime Law
• Most Americans Don't Like Trump's Big Tax Bill
• 'No Tax on Tips' Approved for 2025: What to Know Now