The Big Beautiful Bill Act, enacted on July 4, 2025, introduced a new temporary deduction for individuals who receive overtime pay during tax years 2025 through 2028. This deduction is designed to reduce taxable income for workers who earn qualifying overtime.
Eligible taxpayers may deduct up to:
- $12,500 for Single, Head of Household, or Married Filing Separately
- $25,000 for Married Filing Jointly
This deduction applies only to the premium portion of overtime pay (the amount above regular hourly pay).
What Counts as Qualified Overtime Pay?
Qualified overtime pay depends on how the overtime rate is calculated:
Time-and-a-Half Overtime
- Workers receive 1.5× their regular hourly rate.
- The full premium amount (the “half” portion) counts as qualified overtime pay for the deduction.
Example:
- Regular rate: $20/hour
- Overtime rate: $30/hour
- Premium portion: $10/hour
- Qualified overtime pay = $10 per overtime hour
Double-Time Overtime
- Workers receive 2× their regular hourly rate.
- Only half of the premium counts as qualified overtime pay.
Example:
- Regular rate: $24/hour
- Overtime rate: $48/hour
- Premium portion: $24/hour
- Qualified overtime pay = $12 per overtime hour (50%)
Important Limitations to Know
1. Not All Overtime Is Nontaxable
Despite the name of the provision, only the first $12,500 ($25,000 for MFJ) of qualified overtime pay is excluded from taxable income.
2. Phase-Out of the Deduction
The deduction begins to phase out at:
- $150,000 Adjusted Gross Income (AGI) for single filers
- $300,000 AGI for Married Filing Jointly
3. Overtime Is Still Subject to Payroll Taxes
All overtime pay—regular and qualified—remains fully subject to:
- Social Security tax
- Medicare tax
4. Married Taxpayers Must File Jointly
Married individuals must file Married Filing Jointly to claim the deduction.
How to Claim the Overtime Deduction
The deduction is subtracted from Adjusted Gross Income (AGI) and is calculated on the new:
Schedule 1-A – Additional Deductions (Part III)
IRS Guidance: How Workers Determine Qualified Overtime Pay
IRS Notice 2025-69 provides the rules for how workers should calculate their qualified overtime amount, depending on what their employer reports.
If the Amount Is on Form W-2, Box 14
Use the amount as listed.
If Overtime Information Is Provided on a Separate Statement
When the Overtime Premium Is Reported Separately:
- Time-and-a-half: Use the premium amount.
- Double-time: Use 50% of the premium amount.
When Only Total Overtime Pay for the Year Is Reported:
- Time-and-a-half: Use one-third of the total overtime.
- Double-time: Use one-fourth of the total overtime.
Other Special Situations Covered by IRS Notice 2025-69
The IRS also provides guidance for cases where:
- Workers do not receive a full-year statement for 2025.
- Employers meet overtime rules using different provisions under the Fair Labor Standards Act (FLSA).
Where to Find More Information
Visit the IRS website for full details:
IRS Notice 2025-69 (Calculating qualified overtime compensation)
One Big Beautiful Bill Provisions – No Tax on Overtime
IRS News Release IR-2025-14 (Guidance for individuals receiving tips or overtime in 2025)
