Understanding the New Overtime Tax Rules Under the Big Beautiful Bill (2025–2028)

The Big Beautiful Bill introduces a new tax benefit for workers who earn overtime pay. For tax years 2025 through 2028, eligible employees may deduct the overtime premium portion of their wages from their federal taxable income. This is a temporary adjustment designed to help working Americans keep more of the extra income they earn when they work beyond their standard hours.

Overtime pay remains fully reportable as income, and employers will continue to include overtime wages on employee pay statements and year-end tax forms. What changes is how much of that overtime is counted for federal income tax purposes. Under the new law, the additional earnings that an employee receives for overtime hours—meaning the pay above their normal hourly wage—may be deducted from taxable income.

For example, if an employee earns time-and-a-half for overtime, the “extra half” portion may qualify for the deduction, while the normal hourly rate portion remains fully taxable. This allows the worker to reduce their taxable income while still reporting all earnings as required. The specific amount that qualifies depends on the worker’s wages, hours, and employer reporting.

This deduction is treated as an adjustment to income. Workers may claim it even if they take the standard deduction and do not itemize. The deduction lowers the amount of income that is subject to federal income tax but does not affect payroll taxes such as Social Security or Medicare. State and local tax treatment may vary depending on local laws.

The deduction is not unlimited. There are income-based phase-out rules, meaning taxpayers above certain adjusted gross income levels may see the deduction reduced or eliminated. Eligibility may also depend on whether the employer’s payroll system properly separates regular wages from overtime premium pay, which the Big Beautiful Bill now requires employers to report clearly.

Employers must also provide more detailed pay stubs showing the breakdown of regular wages, overtime hours, and overtime premium amounts. These updated reporting requirements help workers and tax professionals identify the exact overtime amounts that qualify for the deduction.

As with the tip deduction included in the same legislation, this benefit is temporary. The “No Tax on Overtime” deduction applies only to the years 2025, 2026, 2027, and 2028. After that, unless new legislation is passed, overtime pay will once again be fully taxable without special deductions.

Workers should keep all pay statements, along with any employer-provided records of overtime hours and overtime pay, to ensure accurate reporting at tax time. Clear documentation allows tax professionals to calculate the correct deduction and avoid delays or errors in tax filings.

Tax Pros Inc. is ready to help clients understand how the new overtime deduction affects their earnings. Our team can review your pay records, determine eligibility, and ensure that you receive the full tax benefit available during these temporary changes.