Overtime Pay Gets a Tax Break Under the OBBBA (2025–2028)

By Tax&Facts | Published on Feb 4, 2025 | Read: 3 Mins

Starting in 2025 and running through 2028, the One Big Beautiful Bill Act (OBBBA) introduces a new tax benefit for workers who earn overtime. The law allows eligible employees to deduct certain overtime pay from their taxable income, meaning overtime hours won’t be taxed like regular wages. This change is intended to boost take-home pay for both hourly and salaried workers who frequently work beyond their standard schedule.

How the Overtime Deduction Works

The deduction applies to what the law calls “qualified overtime compensation.” Here’s what that means in practice:

Overtime over the regular rate: Only the portion of overtime pay above your standard rate counts. For example, if your regular wage is $30 per hour and overtime is $45 per hour, the $15 “premium” above your base pay is what may qualify.
FLSA-based overtime: The overtime must be required under the Fair Labor Standards Act (FLSA). The FLSA is a federal law that sets minimum wage, overtime pay, and other workplace standards for most U.S. employees. It generally requires that non-exempt workers be paid at least 1.5 times their regular rate for hours worked beyond 40 in a workweek. Overtime required only by state law or union agreements may not automatically qualify for this deduction.
Deduction limits: Single filers can deduct up to $12,500, and married couples filing jointly can deduct up to $25,000.
Above-the-line deduction: This reduces your taxable income before calculating your adjusted gross income (AGI), so you don’t need to itemize to claim it.

In short, the deduction lowers the amount of federal income tax owed on overtime, making each extra hour worked more financially rewarding.

Example: How It Could Affect Your Pay

Imagine you earn $30/hour and regularly work 10 overtime hours per week at $45/hour:

The “premium” portion: $15/hour × 10 hours = $150 per week
Over a year (50 weeks),the qualified overtime adds up to $7,500
With the deduction, $7,500 is subtracted from your taxable income, reducing the federal income tax you owe.

If you earn enough qualified overtime to reach the cap, the deduction could be even more significant — up to $12,500 for a single filer or $25,000 for a married couple.

Who Benefits

Eligible workers include:

Hourly or salaried employees who are non-exempt under the FLSA
Workers whose overtime is mandatory under federal law, not just offered by choice or contract
Taxpayers earning below the phase-out thresholds

Those who may not qualify include:

Independent contractors or gig workers
Employees whose overtime is covered solely by state laws or union agreements
High-income earners above the phase-out threshold
Those filing separately as married

Why This Matters

This change is a targeted effort to increase take-home pay for workers putting in extra hours. While it doesn’t eliminate all taxes on overtime, it reduces federal income taxes on the overtime premium, effectively putting more money in workers’ pockets.

It also encourages employees to work overtime by increasing the after-tax value of extra hours. For employers, it means some additional payroll tracking to report “qualified overtime compensation” properly on W-2 forms.

Key Takeaways

1. The overtime deduction runs 2025 through 2028 and is capped at $12,500 (single) or $25,000 (married filing jointly).
2. Only the FLSA-required portion above your regular rate counts.
3. It’s an above-the-line deduction, so you don’t need to itemize.
4. The deduction is phased out at higher income levels and does not apply to Social Security, Medicare, or state taxes.
5. Workers and employers should track overtime carefully to maximize the benefit.

In short, if you frequently work overtime, the OBBBA gives you a temporary but meaningful boost to your take-home pay — as long as your overtime qualifies and your income is within the limits.

FAQ Frequently Asked Questions (FAQ)

Q1: What is the overtime pay tax break under the OBBBA?
A1: Starting in 2025 through 2028, the One Big Beautiful Bill Act (OBBBA) allows eligible workers to deduct certain overtime pay from their taxable income. This means the overtime premium above your regular rate won’t be taxed like standard wages, boosting take-home pay for employees who frequently work extra hours..

Q2: Who qualifies for this deduction?
A2: Eligible workers include:

Hourly or salaried employees who are non-exempt under the FLSA.
Employees whose overtime is mandated under federal law, not optional or only by contract.
Taxpayers earning below the phase-out thresholds ($150,000 for single filers, $300,000 for married filing jointly).

Workers who may not qualify:

Independent contractors or gig workers.
Employees whose overtime is governed only by state law or union agreements.
High-income earners above the phase-out limits.
Married individuals filing separately.

Q3: How does the deduction work?
A3: The deduction applies to qualified overtime compensation, defined as:

Overtime above your regular rate: Only the extra pay beyond your normal hourly wage counts.
FLSA-required overtime: Hours must exceed 40 in a workweek for non-exempt employees under federal law.
Deduction limits: Up to $12,500 for single filers and $25,000 for married couples filing jointly.
Above-the-line deduction: Reduces taxable income before calculating AGI, so itemizing is not required.

Q4: How does the income phase-out work?
A4: The deduction gradually decreases for:

Single filers earning more than $150,000.
Married couples filing jointly earning more than $300,000.

Q5: Can you give an example of the deduction in practice?
A5: If you earn $30/hour and work 10 overtime hours per week at $45/hour:

Overtime premium: $45 – $30 = $15/hour
Weekly qualified overtime: 10 hours × $15 = $150
Annual qualified overtime (50 weeks): 50 × $150 = $7,500

With the deduction, $7,500 is subtracted from taxable income, reducing federal income tax owed. If your qualified overtime reaches the cap, the deduction could be up to $12,500 for singles or $25,000 for married filers.

Q6: How does this affect my paycheck and taxes?
A6:

Lowers federal income tax on the overtime portion.
Does not affect Social Security, Medicare, or state taxes.
More take-home pay for qualifying workers.

Q7: What should employers and employees do?
A7:

Track qualified overtime compensation carefully on payroll and W-2 forms.
Ensure overtime qualifies under FLSA rules.
Employees should confirm income is within phase-out limits to maximize the deduction.

Q8: Why does this deduction matter?
A8: The OBBBA overtime deduction:

Puts more money in the pockets of workers who work extra hours.
Encourages additional work by increasing after-tax value of overtime.
Provides temporary but meaningful relief from federal taxes on overtime pay (2025–2028).

Article History

v1.0 (May 19, 2025): Initial publication of the article