No Tax on Overtime (2025-2028): What You Need to Know About the New Deduction
What Is the "No Tax on Overtime" Deduction?
If you're an hourly worker who regularly clocks overtime, you just got a significant tax break. Starting in 2025, a new provision allows employees to deduct the premium portion of qualified overtime pay from their taxable income.
This is real money back in your pocket—but there's a catch: your W-2 won't show it, at least not yet. Here's everything you need to know to claim this deduction correctly.
Under the new rules effective for tax years 2025 through 2028, individuals can deduct the premium portion of their overtime wages. This is the extra amount you earn above your regular rate—not the entire overtime pay.
Understanding "Time-and-a-Half"
When you work overtime (typically hours over 40 per week), federal law requires most employers to pay you 1.5x your regular rate. That breaks down into two parts:
| Component | What It Is | Taxable? (New Rule) |
|---|---|---|
| Regular Rate (1.0x) | Your normal hourly wage | Yes — still taxable |
| Premium (0.5x) | The extra "half" for overtime | No — now deductible |
Example
Let's say your regular rate is $30/hour and you worked 10 overtime hours in a week.
| Calculation | Amount |
|---|---|
| Overtime pay (10 hrs × $45) | $450 |
| Regular portion (10 hrs × $30) | $300 — taxable |
| Premium portion (10 hrs × $15) | $150 — deductible |
Over a full year, those deductible premiums add up fast.
Who Qualifies?
This deduction applies to individuals who meet the following criteria:
- W-2 employees — Independent contractors (1099) do not qualify
- Non-exempt workers — You must be eligible for overtime under the Fair Labor Standards Act (FLSA)
- Overtime hours worked — The deduction only applies to actual overtime, not shift differentials or bonuses
Who Does NOT Qualify?
- Salaried exempt employees (even if you work over 40 hours)
- Self-employed individuals
- Independent contractors
- Workers paid straight-time for all hours (no overtime premium)
The W-2 Problem: Manual Calculation Required
Here's where it gets tricky.
The IRS has stated they will not require employers to change W-2 forms for 2025 to separately report overtime premiums.
This means:
- Box 1 of your W-2 will still show your total wages (including all overtime)
- You'll need to calculate the deductible portion yourself
- The IRS is expected to release transition relief guidance with specific instructions
What You'll Need to Calculate Your Deduction
To claim this deduction accurately, gather the following from your employer or pay stubs:
- Total overtime hours worked in 2025
- Your regular hourly rate(s) — this may vary if you got raises during the year
- Pay stubs or payroll records showing overtime breakdowns
The Formula
Deductible Amount = Total Overtime Hours × (Regular Rate × 0.5)
Or simply:
Deductible Amount = Total Overtime Pay − (Overtime Hours × Regular Rate)
How to Claim the Deduction
The IRS has not yet released the final form or line item for this deduction. Based on current guidance, expect one of these methods:
- New Schedule or Worksheet — A dedicated form to calculate and report the overtime deduction
- Adjustment to Income — Similar to educator expenses or student loan interest (an "above-the-line" deduction)
- Transition Relief — Simplified safe harbor calculations for 2025
We'll update this post once final IRS guidance is released.
Tax Planning Tips for 2025
For Employees
- Save all pay stubs — You'll need documentation to support your deduction
- Request a payroll summary — Ask your employer for a year-end report showing total overtime hours and rates
- Don't wait until April — Start tracking now so you're not scrambling at tax time
For Employers
- Consider voluntary reporting — Even though not required, providing employees with overtime breakdowns builds goodwill
- Update payroll reports — Add overtime premium totals to year-end employee summaries
- Communicate the change — Let employees know about this new tax benefit
How Much Could You Save?
The actual tax savings depends on your marginal tax bracket:
| Annual Overtime Premium | 12% Bracket | 22% Bracket | 24% Bracket |
|---|---|---|---|
| $2,000 | $240 saved | $440 saved | $480 saved |
| $5,000 | $600 saved | $1,100 saved | $1,200 saved |
| $10,000 | $1,200 saved | $2,200 saved | $2,400 saved |
For workers in high-overtime industries—manufacturing, healthcare, construction, transportation—this deduction could mean hundreds to thousands of dollars in annual tax savings.
The Bottom Line
The "No Tax on Overtime" deduction is a genuine win for hourly workers, but it requires proactive record-keeping since your W-2 won't do the work for you.
Action items for 2025:
- Start saving pay stubs now
- Track your overtime hours monthly
- Ask your employer for overtime summaries
- Watch for IRS transition guidance (we'll keep you posted)
Questions about how this affects your specific situation? Every taxpayer's circumstances are different. Contact us for personalized guidance on maximizing your 2025 deductions.
This post will be updated as the IRS releases additional guidance on claiming the overtime deduction.