How The New Overtime Pay Deduction Will Impact Taxes In 2025

As of the 2025 tax year, a significant tax break will be available for workers who earn overtime pay, thanks to the One Big Beautiful Bill. This new provision offers a tax deduction on overtime, providing financial relief to many American employees.

While this new benefit may put more money back in your pocket, there are important considerations to keep in mind, including income limits where the deduction begins to phase out. If you’re unsure how this new tax benefit applies to your situation, our experienced tax attorneys at Silver Law PLC are here to guide you through the details and ensure you’re fully prepared.

In July 2025, President Donald Trump signed the One Big Beautiful Bill Act into law, creating a new deduction for certain overtime pay that is effective starting in the 2025 tax year. While the deduction is in place for tax year 2025, key details are still pending, including how employers will report the qualifying overtime.
According to the law, this overtime deduction provision is scheduled to be available through the end of 2028, unless Congress acts to extend it.

If you are anticipating the overtime pay deduction, there are a few things you should know. First, there is a limit. You can deduct up to $12,500 if you are a single filer and $25,000 if you are married filing jointly. For those who are married and filing separately, you do not qualify.

The deduction phases out for those with a modified adjusted gross income (MAGI) of $150,000 for single filers and $300,000 for joint filers. The exact reduction in the deduction amount will depend on your income over these limits, with further details to be clarified by IRS guidance.

It’s important to note that the amount you can deduct is limited to the “extra” income you are making above your base pay. For instance, if you make $20 per hour, but your overtime pay is $30 per hour, you will only be deducting taxes on the additional $10 per hour, not the entire $30. Your tax professional can help you determine the exact amount you can deduct.

To qualify for the new overtime pay deduction, certain criteria must be met. Below is an overview of the key requirements for eligibility:

• You must have a valid Social Security number.
• The deduction applies to nonexempt employees. This includes hourly workers and nonexempt salaried workers who receive overtime pay under the FLSA.
• The overtime must be qualified overtime compensation, meaning overtime pay required by federal law (FLSA) that is above the regular rate, specifically the premium portion.
• Straight-time bonuses, hazard pay, or other pay not considered qualified overtime compensation do not qualify.
• Tips during overtime hours do not qualify under the overtime deduction. They may qualify under a separate no tax on tips provision.
• Independent contractors and self-employed workers are likely not eligible for this deduction, though final IRS guidance has not yet been issued. The deduction primarily applies to employees covered by FLSA.

Employers will be required to report overtime pay separately on Form W-2 and other IRS tax forms.

For the 2025 tax year, a temporary reporting method will be used since Form W-2 will not yet have a dedicated section for overtime pay. The IRS is also offering penalty relief to employers who fail to separately report overtime compensation, but this will only apply for the 2025 tax year. Some employers may report qualified overtime in Box 14 (Other) or may provide a separate statement detailing it.

Starting in 2026, the IRS plans to introduce a specific box on Form W-2 for reporting overtime wages, streamlining the reporting process. If you are an employer and you are unsure how to report your employee’s income due to the new deductions, reach out to a tax lawyer who is always up-to-date on rules and regulations and can walk you through the process to avoid confusion and unnecessary penalties.

Based on all the rules, what would it look like for an individual making $20 an hour to work overtime and calculate their deduction? Your tax lawyer can help you determine what you can deduct. However, let’s say that you work for 10 hours a week and you receive time and a half, so your overtime pay is $30.

You would be receiving $20 per hour of regular pay and $10 per hour of overtime pay. The extra $10 per hour is what is exempt. So if you work 10 hours a week, you would be able to deduct $100 of pay from your overtime pay. If you decide to work 10 hours of overtime every week of the year (52 weeks), the total amount you could deduct would be $5,200.

The new overtime pay deduction offers meaningful tax savings for eligible workers, but it also introduces rules that both employees and employers need to understand, especially as IRS guidance continues to develop.
If you need support applying these rules to your specific circumstances or want to ensure accurate reporting for your business, the tax attorneys at Silver Law PLC are ready to provide informed guidance and dependable assistance. Reach out to us today to schedule a consultation.