No Tax on Overtime in 2025 Trump Tax Law. What’s the Catch?

The brand new 2025 Trump tax regulation contains provisions for “No Tax on Suggestions” and “No Tax on Time beyond regulation.” I lined “No Tax on Suggestions” in a special publish. Let’s look into “No Tax on Time beyond regulation” now. In case you earn each ideas and time beyond regulation pay, you’ll be able to profit from each!

Non-Exempt W-2 Staff

Usually, solely W-2 staff are entitled to time beyond regulation pay. Impartial contractors paid by a 1099 don’t qualify for time beyond regulation. Nor do self-employed enterprise homeowners.

Amongst W-2 staff, for probably the most half, solely hourly (“non-exempt”) staff are entitled to time beyond regulation pay. Most salaried (“exempt”) staff don’t obtain time beyond regulation pay, whatever the variety of hours they work in every week.

Some salaried staff aren’t paid excessive sufficient to qualify as exempt staff. They’re nonetheless labeled as non-exempt and are entitled to time beyond regulation pay.

Exempt and non-exempt check with the necessities mandated by the Honest Labor Requirements Act of 1938. Being exempt signifies that the employer isn’t required to observe these necessities in its employment relationship with you. Your employer will inform you whether or not you’re exempt or non-exempt should you’re undecided.

It’s unlikely that an employer is prepared to re-classify a at the moment salaried worker from exempt to non-exempt to provide the benefit of “No Tax on Time beyond regulation.” Having you as a non-exempt worker would topic the employer to many necessities from the Honest Labor Requirements Act. An employer needs to seek out each cause to make an worker exempt from these necessities.

It nonetheless doesn’t depend should you’re an exempt worker and your employer voluntarily pays you further for further work. The brand new tax regulation limits “No Tax on Time beyond regulation” to time beyond regulation compensation “required underneath part 7 of the Honest Labor Requirements Act of 1938.” Voluntary further pay doesn’t depend as a result of exempt staff aren’t required to be paid for time beyond regulation.

Not What You Assume

The Honest Labor Requirements Act requires that time beyond regulation should be paid at the very least 1-1/2 instances the common hourly wage (“time-and-a-half”). Some state legal guidelines and union contracts require double time in some eventualities. Some employers voluntarily pay double time for holidays.

Suppose your common hourly price is $30/hour and also you’re paid $45/hour for time beyond regulation. You obtain $450 in gross time beyond regulation pay while you work 10 time beyond regulation hours in every week. You’d suppose that “No Tax on Time beyond regulation” means you don’t pay tax on that $450, however that’s not the way it works.

“No Tax on Time beyond regulation” covers solely the pay premium over and above your common hourly price. The “No Tax” half applies to $150 out of the $450 gross time beyond regulation pay for these 10 hours. You continue to pay taxes as ordinary on $300 earned at your common $30/hour price for the time beyond regulation hours.

Consequently, in case your time beyond regulation hours are paid time-and-a-half, you’ll haven’t any tax on just one/3 of your gross time beyond regulation pay. In case you’re paid double time, you’ll haven’t any tax on 1/2 of the gross time beyond regulation pay.

Non permanent Window

As is the case with a number of different provisions within the 2025 Trump tax regulation affecting particular person taxpayers, “No Tax on Time beyond regulation” is simply efficient between 2025 and 2028 (inclusive). It expires on the finish of 2028.

Tax Withholding

“No Tax” refers solely to the federal revenue tax. It doesn’t change the Social Safety and Medicare taxes withheld out of your paychecks. It doesn’t scale back your state taxes.

The IRS will make modifications to payroll tax withholding to deal with time beyond regulation pay in another way, however the modifications gained’t begin till 2026. You gained’t see any change in your paychecks in 2025 except you alter your tax withholding together with your employer.

Tax Deduction

The IRS will add a spot on the W-2 type for employers to interrupt out the time beyond regulation pay premium. Till then, your employer can report back to you outdoors the W-2. You’ll have a brand new tax deduction in your time beyond regulation pay premium while you file your tax return. You’ll get a better tax refund if the tax withholding was too excessive.

This deduction is on the market whether or not you’re taking the usual deduction or itemize your deductions. Nonetheless, it doesn’t decrease your AGI. 100% of your time beyond regulation pay will nonetheless be included in your AGI. It doesn’t make it simpler so that you can qualify for different tax advantages, such because the Baby Tax Credit score.

Greenback Cap

You is probably not allowed to deduct all of your time beyond regulation pay premiums. There’s a $12,500 cap ($25,000 for married submitting collectively). You don’t get this tax deduction should you’re married submitting individually.

As a result of most individuals are paid time-and-a-half for time beyond regulation, a $12,500 cap for the premium portion of the time beyond regulation pay interprets into $25,000 on the common hourly price for the time beyond regulation hours. In case your common hourly price is $25/hour, it means you’ll be able to work 1,000 time beyond regulation hours in a 12 months earlier than you hit the cap. That’s like working 60 hours per week each week of the 12 months.

In case you’re married submitting collectively, and solely one among you has time beyond regulation pay, your cap is twice as excessive as that for a single individual.

Revenue Phaseout

The greenback cap drops slowly as your revenue will increase above $150,000 ($300,000 for married submitting collectively). It decreases by $100 for each $1,000 of revenue above the brink. The cap drops to zero when your revenue reaches $275,000 ($550,000 for married submitting collectively).

Most individuals gained’t be affected by the revenue phaseout as a result of each the greenback cap and the phaseout threshold are set sufficiently excessive.

Each Time beyond regulation and Suggestions

“No Tax on Time beyond regulation” and “No Tax on Suggestions” are impartial of one another. You qualify for each should you obtain each time beyond regulation pay and ideas (or one individual in a married couple will get time beyond regulation and the opposite will get ideas). In case you’re 65 or older, you additionally qualify for the Senior Deduction.

Calculator

I made a calculator that can assist you estimate your federal revenue tax earlier than and after “No Tax on Time beyond regulation” and “No Tax on Suggestions.” Use the calculator to see how a lot you’ll profit. Depart the guidelines subject at 0 should you don’t obtain ideas.

In case you’re married submitting collectively, please embrace revenue from each of you.

The calculator estimates taxes utilizing fundamental assumptions. It assumes the time beyond regulation hours are paid time-and-a-half. Your taxes could also be totally different when you’ve got a extra advanced state of affairs.

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The brief takeaway from “No Tax on Time beyond regulation” is that it isn’t what you suppose. “No Tax on Time beyond regulation” means no tax on 1/3 of the gross time beyond regulation pay for most individuals.

You’ll discover extra deep dives on current modifications from the 2025 Trump tax regulation within the full OBBBA collection.