No Tax on Overtime: Will It Become Law in 2025? What to Know

Have you heard the chatter about a “no tax on tips” proposal? It’s part of the recently proposed “One, Big, Beautiful Bill,” along with another popular provision—”no tax on overtime.”  

Overtime pay, or time and a half, is currently taxed like regular wages. The no tax on overtime proposal would provide a federal income tax deduction equal to overtime wages reported in a year. 

So will it happen? Maybe. The bill, which includes several other controversial provisions, passed in the House but still needs to be passed in the Senate and signed by the president. Here’s what to know about the no tax on overtime proposal and how it would impact your employees on payroll.

Overview of overtime pay and taxation

Under federal law, overtime is 1.5 times an employee’s regular hourly wage for each hour worked over 40 in a workweek. Nonexempt employees are entitled to overtime pay under the Fair Labor Standards Act. 

Is overtime taxed differently than regular wages? No, overtime is subject to the same taxes as regular wages, including federal income, Social Security, and Medicare taxes. 

When employees receive overtime wages, you calculate and withhold taxes the same way as you do for regular wages. You must remit all withheld taxes to the proper agencies and report income and taxes on Form 941 and each employee’s W-2 form. 

What is the no tax on overtime proposal?

Only 12% of employees work FLSA-qualified overtime regularly, and an additional 5% work FLSA overtime occasionally. The no tax on overtime discussion would exempt their overtime wages from federal income tax.

The House introduced the “Overtime Pay Tax Relief Act of 2025” in January 2025, and the Senate introduced a separate “No Tax On Overtime Act of 2025” in March 2025. The House introduced “The One, Big, Beautiful Bill,” which includes a no tax on overtime rule, in May 2025.

How would a no tax on overtime law work? Nonexempt employees who work time and a half (i.e., hours beyond 40 in a workweek) could claim a federal income tax deduction equal to the qualified overtime compensation they receive during the taxable year. 

The no tax on overtime would only apply to nonexempt employees who work FLSA-qualified overtime. The tax deduction would not be available to highly compensated employees. Employees can only claim the tax deduction if they make up to $160,000 and have a Social Security number.  

If the bill becomes a law, the tax deduction for overtime wages would be available for tax years 2025 through 2028. 

Among other changes, “The One, Big, Beautiful Bill” also includes provisions for:

• No tax on tips
• Increasing the standard deduction
• Increasing the child tax credit
• Tax deduction on car loan interest

The no tax on overtime bill only applies to federal income tax. But, several states are also considering a no tax on tips and overtime law. 

What do employers need to do if a no tax on overtime bill passes?

Currently, you must withhold, remit, and report taxes on overtime income to the IRS. If the bill passes, you would likely continue withholding, remitting, and reporting taxes as normal. 

Employees who work FLSA-qualified overtime would be able to claim a tax deduction equal to the amount of overtime wages they report in a year when they file their tax returns. 

So where would you come in? The employee might adjust their W-4 form to lower their tax withholding throughout the year. And when an employee adjusts their federal income tax withholding, you must update your payroll. 

The proposed tax exemption only applies to federal income tax. Overtime would still be subject to Social Security tax and Medicare tax. 

The bill could still change, so stay tuned to see what happens. 

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