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6 min read

When Does No Tax on Overtime Start? What US Employers Need to Know

US payroll

Legal & compliance

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Author

Shannon Ongaro

Last Update

July 25, 2025

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Table of Contents

What is the “No Tax on Overtime” deduction?

Who qualifies?

Reporting requirements for employers and payors

Transition relief for 2025

Why this matters

Keep your US payroll and hiring practices compliant with Deel

Key takeaways
  1. No tax on overtime is in effect from tax year 2025 through 2028.
  2. Qualified individuals can now deduct certain portions of their qualified overtime wages from their taxable income.
  3. Companies with US teams can stay on top of ever-changing tax and employment laws with Deel’s built-in compliance features for PEO and US Payroll.

On July 4, 2025, President Trump signed the One Big Beautiful Bill Act into law, formally designated as Public Law 119-21. Among the sweeping changes included in this landmark legislation is a worker-friendly tax provision that’s already making headlines: the “No Tax on Overtime” deduction.

In effect from tax year 2025 through 2028, this temporary measure is aimed at easing the tax burden on millions of hourly and non-exempt workers who put in extra hours each week.

What is the “No Tax on Overtime” deduction?

The core of the provision is simple but impactful: individuals can now deduct certain portions of their qualified overtime wages from their taxable income.

Here’s how it works:

  • When a worker earns overtime pay, they receive “time-and-a-half” compensation under the Fair Labor Standards Act (FLSA)

  • This deduction applies specifically to the “half” portion of that extra pay—i.e., the premium pay above the regular hourly rate

  • If properly reported on a Form W-2, Form 1099, or another IRS-specified statement, that additional income can now be deducted, up to a set limit

Tax deduction limits:

  • $12,500 per year for individual filers
  • $25,000 per year for joint filers

This means qualifying taxpayers can reduce their taxable income by a significant amount, potentially resulting in hundreds or even thousands of dollars in tax savings annually.

See also: A Guide to US Overtime Pay Laws By State (2025)

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Who qualifies?

The deduction is broadly available, but not unlimited. Key eligibility requirements include:

Income limits: The deduction phases out for taxpayers with a modified adjusted gross income (MAGI) over:

  • $150,000 for single filers.
  • $300,000 for joint filers.

Filing requirements:

  • Taxpayers must include their Social Security Number (SSN) on their return
  • Married taxpayers must file jointly to claim the deduction

This deduction is available to both itemizers and standard deduction filers, increasing its accessibility to a wide range of taxpayers

Reporting requirements for employers and payors

The IRS has placed the onus on employers and payors to ensure transparent, accurate reporting of qualified overtime compensation:

  • They must file information returns with the IRS (or the Social Security Administration)
  • They must also furnish annual statements to employees or contractors showing the total amount of qualified overtime compensation paid during the year

This is similar to how wages are currently reported via W-2 or 1099 forms, but will include additional detail specifically identifying qualified overtime amounts.

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Transition relief for 2025

Recognizing the complexity of implementing new reporting structures, the IRS has announced transition relief for the 2025 tax year:

  • Taxpayers will be granted leniency in claiming the deduction as new forms and systems are put into place
  • Employers and payors will also receive administrative flexibility during the rollout of new reporting requirements

Additional IRS guidance is expected in late 2025 to clarify compliance obligations and streamline taxpayer access to the deduction.

Why this matters

This provision reflects a broader legislative goal to reward hard work and reduce the financial burden on Americans who log long hours. While the measure is temporary—set to sunset after 2028—it sets a precedent for how overtime labor may be treated under the tax code moving forward.

For payroll and HR professionals:

It’s essential to update payroll systems and reporting protocols in advance of the 2025 year-end closeout to comply with the new requirements and help employees take advantage of the deduction.

For workers:

If you work overtime, this deduction could mean more take-home pay when tax season rolls around. Keep an eye out for statements from your employer showing the amount of qualified overtime you earned.

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Keep your US payroll and hiring practices compliant with Deel

Struggling to stay up to date with changing tax and employment laws? Leave it to Deel.

Whether you're using Deel PEO, our built-in compliance features automatically track updates, so you don't have to. This includes:

  • Monthly Workforce Insights: Proactively sends you insights about your workforce, and alerts you to expiring visas, misclassification risks, and other non-compliance with elements

  • Compliance Monitor: Automatically scans, collects, and explains the latest relevant regulatory changes globally

  • Worker Classifier: Uses award-winning research into localized employment court cases and classification tests to classify your workers with over 90% accuracy

  • Knowledge Hub: In-platform global hiring and payroll resource that provides curated country guides and compliance updates

Less stress about regulations means more time to grow your business confidently, knowing compliance is handled. To learn more about Deel, book a 30-minute call with a specialist.

Disclaimer: This article is informational and should not be considered tax advice.

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About the author

Shannon Ongaro is a content marketing manager and trained journalist with over a decade of experience producing content that supports franchisees, small businesses, and global enterprises. Over the years, she’s covered topics such as payroll, HR tech, workplace culture, and more. At Deel, Shannon specializes in thought leadership and global payroll content.

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