Contributed by: PhillipB, FreeTaxUSA Agent, Tax Pro
The new tax law was signed on the 4th of July 2025. It includes a provision that allows people who are paid overtime to take a deduction of up to $12,500 of their overtime pay. The deduction is set to be available from 2025 until 2028. While the IRS still has guidance that needs to be released, this article will include the basic rules for being able to claim this deduction.
Who qualifies for overtime?
- Exempt employees: Generally paid a salary. Can be paid hourly but would not be eligible for overtime.
- Non-exempt employees: Generally paid hourly. Can be paid a salary but would still be eligible for overtime pay.
What portion of my income qualifies?
Income paid to non-exempt workers for time worked over the 40-hour work week is usually the hourly rate of the worker, plus an additional one-half of the worker’s hourly pay rate. A worker getting paid $20 an hour, would get paid $30 an hour for the overtime they work. The new law permits deducting the additional half of ‘time and a half’ pay. For this worker, that means deducting $10 from the $30 per hour rate.
💡Note: State-mandated overtime is not eligible. It only applies to the federal Fair Labor Standards Act (FLSA) overtime rules.
The maximum amount taxpayers can deduct for overtime pay is $12,500.
For the worker mentioned above, that would be roughly 1250 hours of overtime work for the year, or 24 hours of overtime every week. The deduction is a per person deduction, with a maximum deduction of $25,000 for married taxpayers filing jointly.
The overtime income deduction phases out when income reaches certain levels. For most taxpayers, the phaseout begins when modified adjusted gross income exceeds $150,000, and for married taxpayers filing jointly, the phaseout starts at $300,000. The deduction is eliminated at a rate of $100 for every $1,000 of income that exceeds the limitation. This means the deduction is fully eliminated for most taxpayers when income reaches $275,000, and for married taxpayers filing jointly, at $425,000.
What are the other requirements for this deduction?
Taxpayers are only eligible for this deduction if the following requirements are met:
- The taxpayer’s social security number is included on the tax return
- The taxpayer must file a joint return if they are married
How will overtime be reported by employers to the IRS?
Although new W-2 forms for tax year 2025 have not been issued, the IRS will require employers to report the qualified overtime income of each employee. For 2025, employers will have a safe harbor to estimate overtime income paid during the year. The IRS stated in a news release, “Employers and other payors are required to file information returns with the IRS (or SSA) and furnish statements to taxpayers showing the total amount of qualified overtime compensation paid during the year.”
Can I claim this deduction if I don’t itemize my deductions?
Yes. This deduction is available for all filers regardless of whether or not they itemize deductions.