Effective July 4, 2025, the “One Big Beautiful Bill” was signed into law, which includes provisions for a federal income tax deduction on overtime pay. This article briefly explains what employers and employees need to know moving forward.

Here’s how it works

• Deduction Amount: Individuals can deduct up to $12,500 of their overtime earnings from their federal taxable income each year. For joint filers, this cap doubles to $25,000.
• Income Limits: The full deduction is available for individuals with adjusted gross incomes up to $150,000 ($300,000 for joint returns). The allowable deduction is reduced by $100 for every $1,000 of income above these thresholds.
• Qualified Overtime: This deduction applies to overtime compensation required by the Fair Labor Standards Act (FLSA).
• Not a Full Exemption: It’s important to understand that this is a deduction, not a complete exemption from federal income tax. You’ll still owe federal income tax on the portion of your overtime earnings exceeding the deductible amount. State and local taxes, as well as payroll taxes (Social Security and Medicare), still apply to overtime wages.
• Impact on Paycheck: You won’t see an immediate increase in your take-home pay on your regular paycheck due to this deduction. The deduction is applied when you file your annual tax return.
• Temporary Provision: The deduction for overtime pay is currently set to expire at the end of 2028 unless Congress extends it.

In summary, a deduction on federal income tax for overtime pay, with a cap of $12,500 (or $25,000 for joint filers) and income limits, is now in effect for the 2025-2028 tax years. This is a deduction, not a complete exemption, and state and local taxes, as well as payroll taxes, still apply. You will see the impact of the deduction when you file your tax return. For more information, you can visit the IRS website or consult a tax professional.