The “No Tax on Overtime” provision, part of the recently passed One Big Beautiful Bill Act (H.R. 1), is making headlines for its potential to increase take-home pay for millions of American workers. Signed into law by President Trump on July 4, 2025, the bill eliminates federal income tax on overtime earnings and tips for qualifying individuals starting January 1, 2025.
This article explains how the bill works, who qualifies, and what changes workers and employers should expect.
What Is the “No Tax on Overtime” Bill?
The “No Tax on Overtime” proposal grants a federal income tax deduction for overtime pay, targeting non-exempt employees under the Fair Labor Standards Act (FLSA). These workers typically receive time-and-a-half for hours worked beyond 40 in a workweek. The provision is a key part of H.R. 1, also known as the One Big Beautiful Bill, spearheaded by the GOP and endorsed by President Donald Trump.
The bill includes provisions for a deduction of up to $12,500 for single filers and $25,000 for joint filers on eligible overtime income. These deductions apply to tax years 2025 through 2028 and phase out for individuals earning over $150,000 and couples over $300,000 annually.
A separate bill, the Overtime Pay Tax Relief Act of 2025 (H.R. 561), proposed a partial deduction capped at 20% of wages, but it has not passed. Similarly, Senate Bill S. 1046, which proposed a full exemption, was not incorporated into the final version of H.R. 1.
Importantly, while overtime pay becomes exempt from federal income tax, FICA taxes (Social Security and Medicare) still apply.
What Is the “One Big Beautiful Bill”?
Passed by the House on May 22, re-approved on July 3, and cleared by the Senate on July 1, 2025, with Vice President JD Vance casting the deciding vote, the One Big Beautiful Bill Act is a sweeping tax and budget reform law. It delivers several key campaign promises from the 2024 Trump campaign, including:
- No federal income tax on tips and overtime
- A deduction for certain Social Security income (not a full exemption)
- An extension of the 2017 Tax Cuts and Jobs Act provisions
- Auto loan interest deductibility
- Adjustments to Medicaid and border security spending
Republican lawmakers, including House Ways and Means Chairman Jason Smith, call it the largest tax cut in U.S. history. However, nonpartisan estimates from the Tax Policy Center and Tax Foundation suggest the total cost could reach $3 to $5 trillion over the next decade, with concerns over the potential deficit impact and inequities in the tax code.
How Will the Bill Affect Your Paycheck?
Eligible workers will begin earning tax-free overtime starting January 1, 2025, but changes in paycheck withholding may not occur immediately. The IRS is expected to update federal withholding tables by 2026. Until then, employees will need to claim the deduction when filing their 2025 tax returns in early 2026.
To illustrate the impact:
A worker earning $20 per hour, who works 10 overtime hours weekly at $30/hour, earns $300 in weekly overtime – or $15,600 annually. At a 22% tax bracket, this worker currently pays around $3,432 in federal income tax on that amount. Under the new law, up to $12,500 of that can be deducted, reducing federal income tax liability by about $2,750, depending on their tax situation.
However, Social Security (6.2%) and Medicare (1.45%) taxes will still apply, reducing net savings somewhat.
Employers are required to separately track and report overtime earnings on W-2 forms. Payroll systems will need updating, and HR departments should prepare to explain these changes to employees. Note that state income taxes will still apply unless states pass their own exemptions (Alabama, for instance, has one expiring in June 2025).
Are Tips Included?
Yes. The no tax on tips provision allows eligible workers to deduct up to $25,000 in tip income per year ($50,000 for joint filers), subject to the same income thresholds and time limits (2025–2028). This applies to:
- Employees (e.g., restaurant servers, salon workers)
- Gig workers and independent contractors who receive qualified tips
Again, while tips are exempt from federal income tax, they remain subject to FICA taxes, and the deduction does not apply to non-cash tips or service charges.
Employers must report tips separately on W-2s. Independent contractors must track tips for Form 1099-NEC or 1099-K. Critics argue that this could lead to administrative burdens and even “tip inflation” or classification abuse by businesses.
When Does No Tax on Overtime Start?
The law takes effect for taxable years beginning January 1, 2025, and applies through December 31, 2028, unless extended by Congress.
Although the bill is now signed into law, most workers will only notice the benefit when filing their 2025 tax returns in early 2026. The IRS is expected to issue revised withholding guidance by late 2025 or early 2026.
Employers and payroll providers should begin tracking eligible income streams—overtime and tips—separately to ensure compliance with W-2 reporting standards and support accurate tax filings.
Has the Bill Been Passed?
Yes. The No Tax on Overtime and No Tax on Tips provisions are now law under the One Big Beautiful Bill, signed by President Trump on July 4, 2025. The Senate approved the package by a 51–50 vote on July 1, with the House concurring on July 3. IRS implementation guidance is expected in the coming months.
Frequently Asked Questions (FAQ)
Is overtime currently taxed in the U.S.?
Yes. Before 2025, overtime pay is taxed like regular wages—federal income tax, Social Security, and Medicare apply. Starting in 2025, federal income tax will no longer apply to qualifying overtime income, but FICA taxes remain.
Who qualifies?
Non-exempt workers earning less than $160,000 (or $300,000 for joint filers) with a valid Social Security number qualify. Highly compensated employees and independent contractors are not eligible for the overtime tax break.
Will part-time workers benefit?
Only if they work more than 40 hours in a week and are classified as non-exempt under the FLSA. Most part-timers won’t see significant changes.
What’s in the Overtime Tax Relief?
The bill provides an annual deduction on overtime earnings: $12,500 for individuals, $25,000 for joint filers, phasing out beyond $150,000/$300,000. It does not eliminate all taxes on overtime—payroll taxes still apply.
Do states offer similar exemptions?
Most states do not. Alabama implemented a temporary exemption through June 2025, and others like Connecticut and Delaware are considering similar measures. Federal law does not override state income tax unless states act independently.
Conclusion
The No Tax on Overtime and No Tax on Tips provisions are now officially part of U.S. tax law, promising real benefits for hourly and tipped workers. Although full withholding changes may not show up in paychecks until 2026, the law retroactively applies to all qualifying income from January 1, 2025. Employers and workers alike should prepare now by tracking income accurately and consulting tax professionals to maximize savings.
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