No Tax on Overtime? What the New 2025 Overtime Deduction Really Means

Beginning with the 2025 tax year, a new federal deduction may allow certain workers to reduce their federal taxable income for some overtime pay.

This new rule is commonly being called No Tax on Overtime. That sounds wonderful. It also sounds much simpler than it really is, which is usually where the tax code walks in wearing muddy boots.

The rule does not mean that all overtime wages are tax-free. It does not mean payroll stops withholding taxes on overtime. It does not mean the full time-and-a-half paycheck disappears from taxable income.

What it means: Eligible taxpayers may be able to deduct the qualified overtime premium portion of their overtime pay on their federal income tax return.

For tax years 2025 through 2028, the deduction generally applies to the portion of qualified overtime compensation that exceeds the worker's regular rate of pay, such as the half portion of time-and-a-half compensation required under the Fair Labor Standards Act, commonly called the FLSA.