How does “no tax on overtime” work?

Starting in 2025, there is a new IRS rule that allows you to deduct qualified overtime income to reduce the amount of taxes you pay. 

There are many rules to be able to deduct this income including: 

- Only income that is over the amount of your regular rate of pay can be included. For example, if you are paid “time-and-a-half,” only the “half” can be included
- You must have worked more than 40 hours in a week for your overtime income to qualify (other types of overtime or premium pay including differentials or holiday pay doesn’t count)
- You must be a non-exempt employee, not a contractor or gig worker 

To include this deduction on your tax return, you’ll want to look for any qualified overtime compensation on your W-2, Box 14 or talk to your employer and see if they can provide a wage statement. The most you will be able to deduct is up to $12,500 (or $25,000 if filing jointly) of your overtime pay. 

You may still owe taxes on a portion of your overtime pay, including federal taxes, payroll taxes, or state and local taxes. 

Our tax experts can help you figure out how much of your overtime income you may be able to deduct. You can also read more on IRS.gov.