More than 60% of Americans work in occupations that are eligible for overtime pay, with about 20 million workers regularly receiving overtime hours (The White House).
Overtime taxation has undergone a significant transformation with the passage of recent federal legislation. On July 3, 2025, the U.S. Congress passed its “One Big Beautiful Bill,” (OBBB) that includes a No Tax on Overtime provision. President Trump signed the bill into law on July 4. This legislation introduces substantial changes to how overtime compensation is taxed.
For employers, understanding these overtime changes is important for proper payroll management, tax planning, and compliance. This guide covers the new No Tax on Overtime bill, from eligibility to implementation, and what it means for your business.
No Tax on Overtime is part of the OBBB, a tax reform package that became law on July 4, 2025.Beginning with the 2025 tax year, the No Tax On Overtime Act lets workers below certain income thresholds deduct up to $12,500 in “qualified overtime compensation” ($25,000 on a joint return) from their federal income taxes.
It’s important to understand that this legislation doesn’t end taxes on all overtime pay; it provides a tax deduction that can reduce the federal income tax burden on overtime earnings. Also, the exemption only applies to federal income tax. Federal payroll tax — the flat tax split between employers and employees to fund Social Security and Medicare...
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