Understanding the “No Tax on Overtime” Provision in the One Big Beautiful Bill

shaybachelder
Oct 6
3 min read

The recently enacted One Big Beautiful Bill includes a headline-grabbing reform known as the “No Tax on Overtime” provision — designed to put more money in the hands of working Americans.

At Casler Financial, we want to help you understand how this new tax benefit actually works, who qualifies, and how it could affect your take-home pay in 2025 and beyond.

What the Rule Does

Starting January 1, 2025, eligible employees can deduct the premium portion of their overtime pay from their federal taxable income.

That means the extra 0.5x in your “time-and-a-half” rate — not the entire overtime wage — qualifies for this deduction. You’ll still pay Social Security and Medicare taxes, but your federal income tax bill will shrink.

✅ You can claim this even if you take the standard deduction.

The IRS will update withholding procedures beginning in 2026, but the deduction applies to 2025 tax returns.

The deduction is in place for tax years 2025 through 2028, unless extended by Congress.

Income Limits and Phase-Outs

The deduction is designed to help middle-income earners most. Here’s how it’s structured:

Single filers: Up to $12,500 of qualified overtime pay can be deducted.
Married filing jointly: Up to $25,000 can be deducted.
Phase-out thresholds: Begin at $150,000 (single) and $300,000 (joint).
Full phase-out: $275,000 MAGI (single) and $550,000 MAGI (joint).
Not available for those filing Married Filing Separately.

(MAGI = Adjusted Gross Income plus any income excluded under §§911, 931, or 933.)

Eligibility Requirements

To qualify, you must:

Be a W-2 employee eligible for overtime under federal law (non-exempt).
Have your overtime pay clearly reported on your W-2 form.
Earn overtime that meets Fair Labor Standards Act (FLSA) standards.
File under an eligible status with a valid Social Security number.

💡 Overtime must be the FLSA §7 premium; contractors generally aren’t eligible.

Example 1: The Mid-Income Worker

John, an hourly worker earning $30/hour, puts in 10 hours of overtime one week.He earns $450 in overtime pay — $300 for the regular hours plus a $150 “premium” at time-and-a-half.

Under the new rule, John can deduct the $150 overtime premium from his taxable income. At a 22% tax rate, that’s a $33 tax savings for the week. If John works similar overtime for 10 weeks in the year, he could save around $330 in federal income tax.

Example 2: The Dual-Income Family

Sarah and Michael, a married couple filing jointly, each work some overtime through the year.Combined, they earn about $10,000 in overtime pay, with $3,300 of that being premium pay.

They can deduct the $3,300, lowering their taxable income from $180,000 to $176,700. At a 24% marginal tax rate, they save about $792 on their annual federal taxes.

Why This Matters

The No Tax on Overtime deduction aims to:

Encourage and reward hard work by allowing employees to keep more of their extra earnings.
Support middle-income households that rely on overtime to meet rising costs.
Boost local economies by increasing take-home pay and consumer spending.

It’s a targeted tax relief measure that makes overtime pay more rewarding — especially for workers who regularly go above and beyond.

If you frequently earn overtime, we recommend discussing this change with a tax advisor or financial planner to see how it fits into your overall strategy — especially if your income is near the phase-out limits.

Casler Financial — Helping You Keep More of What You Earn.

To learn how new tax laws may affect your financial plan, contact us today or schedule a consultation at www.caslerfinancial.com/scheduling.