If you worked extra shifts, weekends, or long hours this year, you may have heard the phrase “no tax on overtime.” Here is the practical reality: starting with tax year 2025, there is a new federal deduction for certain overtime pay. It can lower your taxable income—but it has caps, income phase-outs, documentation rules, and important limitations.
This post explains what counts, who qualifies, how the IRS expects it to be reported (especially for 2025), and what our clients should upload so we can claim it correctly.
1) What changed?
Beginning tax year 2025 through 2028, eligible taxpayers can claim a deduction for “qualified overtime compensation.” IRS+1
Key headline numbers:
- Up to $12,500 per year (or $25,000 if Married Filing Jointly). IRS+1
- Deduction begins to phase out when your MAGI exceeds $150,000 (or $300,000 for joint filers). IRS+1
- You generally need a valid SSN, and if married, you must file jointly (Married Filing Separately is not eligible). IRS+1
2) What overtime pay actually qualifies?
This is the most important point: the deduction is intended for the overtime premium portion—the pay above your regular rate (for example, the “half” portion of “time-and-a-half”) that is required by the Fair Labor Standards Act (FLSA). IRS+1
In plain English:
- If your normal rate is $20/hour and overtime is $30/hour, the premium is $10/hour (the part above your regular rate). The rules focus on that premium concept. IRS
Also important:
- This is an income tax deduction—not a payroll tax exemption. Overtime wages are generally still subject to Social Security and Medicare taxes. IRS
3) Who is most likely to qualify?
In general, the deduction is geared toward employees whose jobs are covered by overtime rules (FLSA-covered workers). The IRS describes qualified overtime compensation in connection with FLSA coverage and premium pay above the regular rate. IRS+1
If you’re paid salary, it depends on whether your position is treated as overtime-eligible (many salaried roles are “exempt,” but not all). The key is whether you receive overtime premium compensation of the type contemplated by the rule. IRS Apps
4) 2025 is a transition year: what to expect on your W-2 (and why you may need pay stubs)
For tax year 2025, the IRS acknowledges that a separate overtime breakout may not appear clearly on the statement you receive. Some employers may show it in Box 14 of the W-2 or a separate statement; others may not. IRS
Because of that, the IRS allows taxpayers to support the deduction using other documentation (such as earnings/pay statements or similar records) and to determine the amount using an IRS-accepted reasonable method, particularly for 2025. IRS+1
Separately, Treasury/IRS issued penalty relief for employers/payors for 2025 as a transition period for the new tips/overtime reporting requirements. IRS+1
5) How this may affect your paycheck (and your refund)
A deduction can:
- reduce your taxable income,
- potentially lower your federal income tax, and
- sometimes increase your refund (or reduce what you owe).
However, the exact impact depends on your filing status, total income, and whether you’re subject to the phase-out. IRS+1
The IRS also encourages taxpayers to update withholding to reflect 2025 law changes if needed (so you’re not waiting until filing time to benefit). IRS
6) What Pivot Aide Tax clients should upload (so we can claim it correctly)
To maximize accuracy and minimize IRS issues, upload the following through your secure portal:
- All W-2s / 1099s (every employer and payer) IRS
- Final pay stub (or year-end payroll summary) showing overtime totals, rates, and hours
- If available: W-2 Box 14 details or any employer overtime statement IRS
- Any documentation that helps substantiate overtime premium calculations (earnings statements, payroll portal screenshots, etc.) IRS
7) Quick FAQ
Does everyone who works overtime qualify?
Not automatically. The IRS rule targets qualified overtime compensation (premium pay above the regular rate tied to overtime rules), and it’s subject to caps, phase-outs, and eligibility requirements. IRS+1
Do I still pay Social Security and Medicare tax on overtime?
Generally, yes—this is not the same as payroll tax relief. IRS
What if my employer doesn’t clearly show qualified overtime on my W-2 for 2025?
The IRS recognizes 2025 as a transition period and allows support through other documentation and reasonable methods. IRS+1
Bottom line
“No tax on overtime” is real—but it’s a deduction with rules, not a blanket exemption. If you worked overtime in 2025, the best thing you can do is upload your W-2 and pay documentation early so we can compute the eligible amount cleanly and claim it correctly.
