Understanding the Implications of the No Tax on Overtime Rule
August 29, 2025
First, working overtime does not mean you are getting an automatic increase in
your take-home pay because it is not going to be taxed.
That is not what is going to happen. The tax savings will be in the form of a tax
deduction when you file your Federal tax return the following year. There will be
no immediate impact.
Second, it only applies for Federal income taxes. It does not include State, Social
Security or Medicare taxes.
Third, it also only applies to the overtime premium and within certain deduction
and wage limits.
You can only deduct the pay that exceeds your regular rate of pay. The 'half'
portion of 'time-and-a-half' compensation. For example, say you make $20 per
hour and work 5 hours of overtime that week at time-and-a-half. The deduction
would the Federal tax on $50 of premium pay. ($20 divided by 2 times 5 hours)
Finally, the maximum annual deduction is $12,500 for single filers and $25,000
for joint filers. The deduction phases out for taxpayers with modified adjusted
gross income over $150,000 (or $300,000 for joint filers).
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