No Tax on Overtime Explained: Check Meaning, Eligibility and Employer Requirements

In July 2025, the US government introduced a major change in how overtime income is calculated under the new One Big Beautiful Bill Act (OBBBA). The law allows eligible workers to cut federal income tax on one part of their overtime income, providing financial relief for millions of employees per hour. While not all taxes have a complete discount, this remedy can significantly increase the tax-home pay for those additional hours of working. It aims to encourage productivity, reward hard work, and stimulate the labor market. However, benefits come with some limitations, including the temporary nature of the income limit, eligibility rules, and provisions.

.@POTUS on the positive effects of the One Big Beautiful Bill: "The biggest tax cuts ever, No Tax on Tips... No Tax on Overtime. From a business standpoint, the jobs are coming in like we've never seen them before." pic.twitter.com/jIk3XcxtXY

— Rapid Response 47 (@RapidResponse47) July 7, 2025

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What does “No Tax on Overtime” Mean?

The "no tax on overtime" rule is part of a new American law passed in July 2025, aimed at providing financial relief to hardworking employees. Under this rule, if you work for more than 40 hours a week and acquire overtime salary, you will not have to pay federal income tax on that extra income. This allows workers to benefit from keeping their money and putting it directly into extra hours. 

However, the rule does not mean that all taxes have been removed - you still have to pay social security, medicine, and possibly state or local taxes. Tax breaks apply only to those who earn under a certain income level, and not everyone is eligible. In addition, the rule is temporary and is prescribed only for the period from 2025 to 2028. Nevertheless, for several hours per hour and non-synchronous workers, it can mean attention in the tech-home payable and some much more essential financial assistance.

Who Qualifies for “No Tax On Overtime”?

If you are a per-hour worker who earns overtime and comes within your adjusted gross income (AGI) qualified limits, you can expect a noticeable reduction in your house payments for the next few years. This tax break gives workers a chance to keep whatever they earn during extra hours on the job. 

Not everyone is eligible for this tax break. "No tax on overtime" benefits mainly apply under the Fair Labor Standards Act (FLSA) to laborers and some non-salaried employees per hour.

 These are workers who legally earn an overtime salary (time-and-a-half) for any hour worked ahead of 40 in a week. 

This includes such roles: 

• Retail and Store Staff 

• Factory and warehouse workers 

• Healthcare workers 

• Administrative Assistant 

• Technicians and support roles 

This does not apply to salaried professionals, freelancers, or self-employed individuals who do not earn traditional overtime.

Income Limits to Qualify

To receive this tax deduction, your annual income must fall below certain limits:

• $100,000 for individuals
  

• $150,000 for heads of household
  

• $200,000 for married couples filing jointly

Employer Requirements

Here are some of the basic requirements for employers to be eligible for “No Tax On Overtime”.

Separate Reporting of Overtime Pay 

Employers must clearly separate overtime salaries from regular wages in their payroll system. This is important because overtime income should be reported separately on W-2 forms of employees, using a specific code or section specified by the IRS. 

 Need Parole System Updates 

To follow the new law, employers may need to update their payroll software or system. These updates will help track the part of the overtime that qualifies for tax deduction and ensure proper record-keeping. 

Taxes Still Apply at Some Levels 

Even though the law allows deduction on federal income tax, employers will still have to withhold social security, Medicare, and applicable state/local taxes from the overtime salary of employees.

 Legal and Compliance Risk

 IRS punishment or legal issues may occur due to improper reporting or failure to follow new rules. Employers are advised to work with HR and tax professionals to ensure complete compliance and avoid errors.