A new federal law enacted last year provides a tax benefit to employees who receive overtime pay – but calling it a “No Tax on Overtime” law is a bit of misnomer. For starters, OT pay remains taxable and subject to withholding rules. And while a new income tax deduction may be available to some employees who work overtime, only a limited portion of federally required overtime compensation is tax deductible. We’ll clear up some of the biggest misconceptions surrounding these new rules and provide some key employer takeaways – which will become especially important this tax season and beyond as more employees learn the realities of these rules and the IRS cracks down on employers’ new filing and information reporting obligations.

Overview of “No Tax on Overtime”

The One Big Beautiful Bill Act (OBBBA), which President Trump signed into law last year, includes a new federal income tax deduction related to overtime pay. This new deduction:

• applies for tax years 2025 through 2028;
• allows eligible workers to claim up to $12,500 (or $25,000 if married filing jointly) in “qualified overtime compensation” they received during the applicable tax year;
• phases out for individuals whose modified adjusted gross income (MAGI) for the year exceeds $150,000 ($300,000 if married filing jointly); and
• is not available if the individual’s MAGI is at or above $275,000 ($550,000 if married filing jointly).

The deduction is allowed for both itemizers and non-itemizers, so long as the...

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