NO TAX ON OVERTIME?

 

Like “No Tax on Tips” the statement “No Tax on Overtime” in relation to the recently passed tax legislation is misleading.

The so-called “One Big Beautiful Act”, signed into law on July 4^th, did not exempt all overtime pay from all federal taxes.  The Act created a federal income tax deduction for up to $12,500 ($25,000 on a joint return) in overtime pay received for tax years 2025 (all of 2025) through 2028, phased out based on your “Modified” Adjusted Gross Income (MAGI).  For this deduction MAGI is your Adjusted Gross Income plus any exclusion for foreign income or income from Puerto Rico, Guam, American Samoa, and the Northern Mariana Islands.

There is no change to how overtime pay is reported.  The employer must still withhold, and match, the 7.65% FICA (Social Security and Medicare) tax and pay FUTA (federal unemployment) tax on overtime pay.  Employers received no tax benefit related to overtime pay in the new law.

As in the past, employers will include overtime pay in the amount reported as “wages, tips, other compensation” in Box 1, Social Security wages” in Box 3, and “Medicare wages and tips” in Box 5 of your 2025 Form W-2.  Overtime pay that qualifies for the deduction will be separately reported in Box 12 or Box 14.

And, also as in the past, you will report the amount from Box 1 of all W-2s on Line 1a of your 2025 Form 1040 (or 1040-SR).  What you will now be able to do is claim a deduction for up to $12,500, or $25,000, of qualified overtime (as identified on your Form W-2), which reduces your federal net taxable income. 

The amount of the maximum deduction you can claim for qualified tips is reduced by $100 for every $1,000 (or fraction thereof) that your MAGI exceeds $150,000, or $300,000 if you are married and filing a joint return with your spouse. 

What qualifies as overtime pay is pay for hours worked in excess of the standard 40-hour workweek, calculated at a rate above the employee’s regular hourly rate.  Only the “premium portion” of overtime pay qualifies for the deduction – the “half” portion of “time and a half”.  If an employee’s regular hourly rate is $20.00 and he/she is paid $30.00 per hour for overtime work only $10.00 of the overtime pay qualifies for the deduction.

This is not an itemized deduction.  You can claim the deduction for overtime pay whether or not you itemize your deductions on Schedule A.  For married individuals the deduction is only available if you file a joint return.  This new deduction is not available on “Married Filing Separately” returns.   

The Act does not change the state tax treatment of overtime pay.  Your overtime pay will still be subject to any state income tax and state payroll tax.

So, you could be paying no federal income tax on a portion of your overtime pay.

The amount that qualifies for the overtime pay deduction, and also the tip deduction, does not have to be calculated by the taxpayer, or tax preparer.  The amount of qualified overtime pay or tips will be separately reported on the employee’s Form W-2.

As with the new tip deduction – as a taxpayer and citizen I oppose the deduction for overtime pay as being unfair to W-2 employees who do not receive time and a half pay if they work more than 40 hours in a week.

TTFN