Extra hours feel great until you receive your paycheck, and most of you wonder, “Why is my paycheck taxed so heavily?” Here’s what you need to know.
- The enactment of current federal law has significantly changed overtime taxation.
- The U.S. Congress passed the “One Big Beautiful Bill” (OBBB), which contains a clause about “no tax on overtime”, on July 3, 2025.
- On July 4, President Trump signed the bill into law. This legislation introduces significant changes to the taxation of compensation for extra hours.
- This temporary act begins on January 1, 2025, and will remain in place until 2028.
Employers must understand these variations in overtime to effectively manage payroll, plan for taxes, and ensure compliance. Let’s walk you through what exactly this “no tax on overtime” bill is, how it works, and when does no tax on overtime starts in Texas.
What is the no tax on overtime bill?
The “No Tax on Overtime Act” allows employees who earn less than a specific amount to deduct up to $12,500 in “qualified overtime compensation” ($25,000 on a combined return) from their federal income taxes starting in the 2025 tax year.
It’s crucial to realise that this law offers a tax deduction that can help reduce the federal income tax burden on overtime earnings. Additionally, only federal income tax is excluded. Overtime compensation is still subject to the federal payroll tax, which is a flat tax split between employers and employees to fund Social Security and Medicare.
When does no tax on overtime start in Texas?
The “No Tax on Overtime” bill passed on July 4, 2025. However, it applies retroactively from January 1, 2025 and will remain in effect till 2028, during Trump’s tenure. This means that overtime compensation paid on or after January 1, 2025, is eligible for the new tax deduction.
In simple words, these tax benefits are available to employees who have already worked overtime in 2025 when they file their 2025 tax returns in Texas.
However, it is essential to note that State tax treatment may vary, despite the No Tax on Overtime Act being a federal law. Therefore, if you want to know how their state handles overtime taxes, you should speak with your tax consultants.
How does no tax on overtime work?
The No Tax on Overtime Act provides a deduction from federal income taxes for extra hours worked, offering tax relief to hardworking overtime workers and allowing them to keep most of their paycheck. This is how it works:
Deduction Limits:
If you earn less than a set amount, you can deduct up to $12,500 from your federal taxable income. However, for married or joint filers, this amount goes up to $25,000. You can claim this while filing for your federal tax returns.
Income Threshold:
If you earn over $150,000, you will automatically phase out of this no-tax-on-overtime bill. While this act benefits low-income or salaried employees, high-income individuals will receive low or no benefit at all.
Payroll Taxes:
Even though you will get a tax break from all federal income taxes, you are still subject to payroll taxes, including your Social Security and Medicare.
Who qualifies for no tax on overtime?
You must know that not everyone is eligible for a federal income tax deduction. It depends on your salary limits, legal work status, and the type of job.
- Salaried employees
If you are a salaried person, you may still qualify, but the rules are quite specific.
- Salary less than $150,000
- You are entitled to overtime pay as per the Fair Labor Standards Act (FLSA).
- Get paid as per the federal rules.
- Keep accurate records of your paycheck and file for federal tax returns wisely and on time.
Many professionals and managers are not entitled to overtime pay, despite being salaried employees and not qualifying for it.
- Hourly employees
If you are paid by the hour, you are more likely to benefit from this “no tax on overtime” bill. This includes firefighters, nurses, and others who work overtime, and your income does not exceed the set amount of $150,000. To ensure you qualify for this, you must:
- Have a valid Social Security number.
- Work over 40 hours a week.
- Entitled to overtime pay under the FLSA.
- Get paid for at least time and a half for overtime.
How will no tax on overtime affect businesses or employees?
This new No Tax on Overtime rule does not significantly impact employers, but they must be prepared for the changes they will face. Employers must accurately maintain detailed records of who works overtime and how much they are paid. This will also help employees to claim their deductions while staying compliant with the laws.
However, business owners must prepare themselves with these new benefits of federal income tax deduction, which will encourage more workers to work overtime.
Conclusion
The “No Tax on Overtime” Act offers Americans a significant break on federal income taxes, allowing them to keep most of their overtime pay. This Act benefit hardworking employees, especially those who depend on overtime income. The tax years 2025–2028, which correspond with the end of President Trump’s tenure, are eligible for this exemption. However, federal and state tax laws change over time, so you must stay on top of the new tax rules and how they affect income. At H&M Tax Group, we will make sure you understand the current tax rules and laws and help you file your tax returns correctly.
