You may have heard that the tax rules regarding overtime pay are changing—but taxation of overtime earnings is not ending entirely. Historically, overtime pay has been taxed just like any other salary, but new rules that take effect in the 2025 tax year provide a break to some people who work extra hours.
Bottom Line Personal asked tax preparer Abby Eisenkraft, EA, what employees need to know about the new overtime pay tax rules…
Overtime earnings still are subject to income taxes—but a portion of these earnings now might be deductible.
When an hourly worker works more than 40 hours in a week, he/she often receives “time-and-a-half” for the excess hours—that is, 150% of his usual hourly pay rate.
Under the new rules: The portion of overtime earnings attributable to this higher overtime hourly rate may be tax-deductible.
Example: An employee who normally earns $20 per hour works 41 hours in a week and is paid time-and-a-half—$30—for that one extra hour worked. The first $20 of that overtime pay will face the same tax rates and rules as this employee’s other earnings…but the additional $10 received due to the higher overtime pay rate could be tax-deductible when this employee files his tax return.
Social Security and Medicare taxes still apply to all overtime earnings
The new overtime tax rules do not alter the 7.65% FICA tax—this tax will continue to be applied to overtime earnings as well as other earnings, with no reduction or deductions for overtime pay. Many state and local income taxes likely also will continue to treat overtime earnings the same as any other earnings.
The overtime pay deduction is capped
Single taxpayers can deduct a maximum of $12,500 in overtime income…married couples filing jointly, a maximum of $25,000. Government estimates suggest that this overtime deduction is likely to reduce the typical eligible worker’s tax bill by perhaps $1,000 to $2,000.
There are income limits
High earners are not eligible for this tax deduction. It phases out for single taxpayers at $150,000…and $300,000 for married taxpayers who file jointly.
You don’t have to itemize your taxes to claim the overtime pay deduction
This is an “above the line” deduction, which means it can be claimed even by taxpayers who take the standard deduction rather than use Schedule A to itemize their taxes.
Only hourly workers qualify
This tax deduction is not available to employees who earn a fixed salary rather than an hourly wage—even if the salaried worker receives a bonus for working especially long hours on a project. It’s available only to hourly-wage W-2 employees who are “non-exempt” under the Fair Labor Standards Act. If you’re not certain whether this applies to you, consider whether you automatically receive time-and-a-half overtime pay whenever you work more than 40 hours a week—if so, that’s a strong indication that you qualify for this deduction. If you do qualify, your employer will be responsible for letting you know how much eligible overtime compensation you earned during the year. Employers must separately report qualified overtime compensation on W-2 forms as well as on paystubs.
This overtime tax deduction isn’t necessarily permanent
It takes effect in 2025 and is slated to be available through the 2028 tax year. Additional legislation will be necessary to continue this deduction beyond then.
