No Tax on Overtime: New Proposal Promises Bigger Paychecks and a Boost for Workers

WASHINGTON – Workers may soon be able to keep every penny of their time-and-a-half pay. On 30 June 2025 the Senate Finance Committee released draft language for the “One Big Beautiful Bill Act,” echoing the House-passed HR 1 and the stand-alone Overtime Pay Tax Relief Act (H.R. 561) that promise “no tax on overtime.” If enacted, the plan would let most non-exempt employees deduct overtime earnings from federal taxable income beginning with the 2025 tax year, creating the first nationwide overtime tax break in U.S. history. Key points at a glance • Who qualifies? Hourly and salaried-non-exempt employees whose extra hours are covered by the Fair Labor Standards Act (FLSA). • How much is deductible? Up to $12,500 for single filers or $25,000 for married couples filing jointly. The write-off phases out starting at $150,000 AGI ($300,000 joint). • How long does it last? Tax years 2025-2028, unless Congress renews it. • What about Social Security and Medicare? FICA withholding stays in place; the relief applies only to federal income tax. Why overtime would show up on your W-2 Employers would list an employee’s annual overtime total in a new box on Form W-2. Taxpayers would then claim the above-the-line deduction on Form 1040, whether or not they itemize. The IRS is expected to release coding instructions once the bill is finalized, but payroll software vendors are already building test fields to avoid a year-end scramble. How much could you save? • Example 1: A warehouse associate earning $22/hour logs 10 overtime hours weekly, adding $17,160 in OT for the year. After the full $12,500 deduction, the worker’s federal tax bill drops roughly $1,500 (assuming a 12% marginal rate). • Example 2: A registered nurse earning $38/hour with substantial OT could hit the $25,000 joint cap, trimming about $3,300 from a household tax bill in the 22 % bracket. Compliance steps for employers 1. Map overtime pay codes to a dedicated W-2 field once IRS guidance is issued. 2. Audit exempt/non-exempt classifications; only FLSA-mandated OT is eligible. 3. Update employee communications and withholding calculators so workers don’t mistakenly reduce Form W-4 allowances today for a deduction they’ll claim next year. Political outlook Republicans tout the measure as a middle-class booster and a way to encourage extra shifts in tight labor markets. Democrats are divided: some back the relief, others want the dollars directed to expanding the Child Tax Credit instead. The Senate text is moving through budget reconciliation, meaning it can pass with a simple majority but must still clear parliamentary rules on deficit impact. What could derail the plan • Cost: The Joint Committee on Taxation estimates a four-year price tag near $87 billion. • Complexity: Payroll experts warn that mis-coding discretionary bonuses as overtime could invite audits. • Equity: Salaried exempt professionals, gig workers and many public-sector employees would not benefit, fueling calls for a broader earnings credit. Bottom line The phrase “no tax on overtime” is no longer a campaign slogan; it sits in real legislative text and could be law in time for 2025 paychecks. Employees who regularly clock extra hours should start tracking those earnings, and employers should prepare systems now to capture and report them. Final votes are expected after the summer recess, so the next few months will determine whether America’s overtime goes tax-free or stays fully taxable for another year.