407-344-1012 
October 14, 2025 
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Are you tired of paying high taxes on your overtime pay? The new “No Tax on Overtime” law—part of Donald Trump’s 2025 One Big Beautiful Bill Act (OBBBA)—is a game-changer for American workers. In this video, we break down how this new tax reform lets you keep 100% of your overtime pay without paying federal income tax on those extra hours!
👉 In this video, you’ll learn:
- What the “No Tax on Overtime” law actually means for your paycheck
- Who qualifies and how to know if you’re eligible
- How much money you could save each year under the 2025 OBBBA
- When this new rule takes effect and how long it will last
- How this change affects employers, small business owners, and freelancers
💡 Whether you’re an employee working extra hours or a small business owner managing payroll, this video explains everything you need to know about Trump’s 2025 OBBBA tax reform in simple terms.
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This video is intended for education purposes and should not be taken as legal, financial or tax advice. You should consult with a professional about your unique situation before acting on anything discussed in these videos. Freedomtax Accounting and Multiservices Inc., Freedom Insurance Financial Inc., Freedom Realty Source Inc., and Freedom Immigration International Inc. are providing educational content to help small business owners and individuals become more aware of certain issues and topics, but it cannot give blanket advice to a broad audience. Things are always changing, therefore, this channel may not contain the most up-to-date information. Neither Freedomtax Accounting and Multiservices Inc., Freedom Insurance Financial Inc., Freedom Realty Source Inc., and Freedom Immigration International Inc. nor its members can be held liable for any use or misuse of this content.
TRANSCRIPTION
Overtime, more hours, more money, less taxes? The One Big Beautiful Bill Act brings no tax on overtime, but not in the way most people think. Welcome to the Freedom Group channel. We try to simplify taxes and business decisions so that you guys can focus on growth.
Freedom Group is made up of three companies that have served our community for over 20 years now. We help with taxes, accounting, insurance, financial planning, and real estate, and we support both your business and your personal needs. Let’s clear up exactly what the OBB VA does for overtime pay.
The One Big Beautiful Bill Act introduces a new temporary deduction for qualified overtime compensation, and it’s for tax years 2025 through 2028. This provision is often described as, or called, no tax on overtime, but the legal mechanics and limitations are really important to understand for both the employers and the employees. The new Internal Revenue Code, Section 225, as was added by the OBB VA, it allows individual taxpayers to deduct from their gross income up to $12,500, or $25,000 for joint filers, per year of qualified overtime compensation received and reported on what’s called specified information returns.
In other words, W-2s are 1099. This deduction is available to both employees and the self-employed, provided the overtime pay is required under Section 7 of the Fair Labor Standards Act, or the FLSA. That is the half portion of the time and a half pay for hours worked in excess of 40 hours per week.
Here are some of the key features of this deduction. The deduction is gonna be available whether or not the taxpayer itemizes the deductions or takes the stamp. The deduction is phased out for taxpayers with modified adjusted gross income, or MAGI, over $150,000 for single filers and $300,000 for joint filers, reduced by $100 for each 1,000 that you go over the threshold.
The deduction is only available if the taxpayer includes their social security number on the return, and if they’re married, that they file jointly. The deduction is not available for overtime pay that is also considered qualified tips, as there’s a separate OBB VA tip deduction for that. The deduction is only for qualified overtime compensation, not for all wages or for overtime that is not required by the FLSA.
So what exactly does no tax on overtime mean? It does not mean that overtime pay is excluded from gross income or is not subject to withholding. Instead, that the taxpayer must include all of his or her wages, including the overtime in their gross income, and the employer must withhold income tax like social security and Medicare and the federal withholding taxes. What happens is that the taxpayer then claims the deduction for qualified overtime compensation on their personal tax return, reducing their taxable income by the amount of the deduction up to the cap and subject to the phase-out.
So in practice, overtime pay is still subject to payroll tax withholding, which is income tax, social security, and Medicare at the time that it’s paid. So you may not feel a difference right away. The taxpayer receives and will feel the benefit of deduction when they file their annual tax return come tax time, because it may result in getting a bigger refund or reduced balance due.
The deduction reduces your taxable income, not the tax liability directly like a credit would. The actual tax savings is gonna depend on the taxpayer’s marginal tax rate. So overtime pay is not truly tax-free in the sense of being excluded from gross income or exempt from all taxes.
Instead, the deduction is going to reduce the amount of income that is subject to tax up to the statutory limit. So let’s take a look at an example. Let’s say an employee earns $15,000 in qualified overtime pay in 2025.
The maximum deduction is 12,500 for the single filer. So that remaining 2,500 to get to the 15,000 is not gonna count towards the benefit. If the employee is in the 22% marginal tax bracket, the deduction reduces their tax liability by 2,750.
That would be 12,500 times the 22%, not the full 12,500. Again, social security and Medicare taxes still apply to all wages, including the overtime, and are not affected by the deduction. And state income tax treatment may differ from state to state, as this deduction is a federal provision.
So here are some things to consider as far as the reporting and compliance aspect. Employers and payers are required to report the amount of qualified overtime compensation on information returns. Remember, that’s the W-2 or the 1089.
This is very important. The IRS is directed to issue guidance and provide transitional relief for the first year of implementation. Since it’s all so new, and this was just passed this July, 2025.
In other words, the IRS is not going to go crazy issuing penalties the first year since they know it takes time to make the necessary changes and implement them. Make note that the deduction is not available for overtime pay received in a SSTB, or a specified service, trade, or business, as they are defined in IRC 199-AD2. Married individuals must file jointly to claim the deduction.
And the deduction is temporary. It’s only available for tax years 2025 through 2028, unless it gets extended. So what does qualified overtime mean? The definition as used in the OBVBA and the new Internal Revenue Code 225 is as follows.
Qualified overtime compensation refers to overtime compensation paid to an individual that is required under section seven of the Fair Labor Standards Act of 1938. And that is in excess of the regular rate as used in that section, at which the individual is employed. In other words, it is the portion of pay that represents the premium paid for overtime work above the employee’s standard hourly wage, as mandated by the FLSA.
The definition specifically excludes any qualified tip as defined in section 224D from being considered qualified overtime compensation. This means that the tips, even if they were received for overtime hours, do not count as qualified overtime compensation for the purposes of the deduction under the new Internal Revenue Code 225. The deduction for qualified overtime compensation is only available for the amount that is both received during the taxable year and is included on the statements furnished to the individual pursuant to section 6041D4 or 6051A19, which are the W-2s and 1089s.
In other words, this means that the overtime pay must be properly reported on the relevant tax form to be eligible for the deduction. The deduction is also subject to additional requirements, such as the taxpayer including their social security number on the return. And if they’re married, like I said before, they have to file a joint return to claim the deduction.
Now, what does that mean for your actual paycheck? Because it’s a deduction, the real tax benefit reduces your federal taxable income when you file the taxes after the year is over. If you don’t make any changes to your W-4, the federal withholding is gonna stay the same. But since your taxable income will be lowered by the deduction, you could get the benefit as a refund when you file on your return, or you can update your W-4 and lower your withholding so you see more of the money in each pay period instead of receiving it in a refund or having it potentially reduce your tax liability.
Side note, the W-4 is the form that you fill out to give to your employer, and that determines how much money is taken out in federal withholding. Social security and Medicare are set percentages, but the federal withholding is based on how many people are in your household, if you have other income. Form W-4 helps you identify these other sources of income and potentially determine how much you will be withheld.
You could even include to have an extra amount withheld if you know that your tax liability will be high and you wanna get a better cushion for it. So if you want to, you can adjust your W-4, and that’s going to reduce how much is taken out of your check each week, knowing that this deduction is gonna lower your taxable income at the end. However, if you lower it too much, you could end up owing.
So that’s the caveat. Now back to the topic. If you own a business, here’s what you need to think about.
You’re gonna need to track which overtime amounts qualify and possibly update your payroll reporting. It may be a good idea to explain to the employees how the withholding might look different or might not because the deduction comes into play on the personal taxes. Talk to your payroll provider and your tax advisor.
Preparation always prevents surprises. Now there are important limits. Of course, if you earn too much, the deduction is gonna phase out.
So the phase out of the deduction begins when the taxpayer’s modified adjusted gross income or the MAGAI exceeds $150,000 for single filers and all other filers other than joint returns or $300,000 for joint returns. The deduction is reduced by $100 for each 1,000 or fraction thereof by which the taxpayer’s MAGAI goes over the applicable threshold. So what’s MAGAI and how do you calculate it? I’m glad you asked.
MAGAI is defined differently depending on what deduction or credit one is talking about. But according to the OBVBA’s statutory language, as summarized, MAGAI for this purpose is the adjusted gross income or the AGI plus certain gross income items that are excluded from AGI, specifically foreign earned income, foreign housing allowance, Guam source income, American Samoa source income, North Mariana Islands source income, Puerto Rico source income. So the OBVBA adds back those excluded foreign or territorial income items to the AGI to get to the MAGAI used in determining the phase out.
After determining the maximum allowable deduction, which is up to $12,500 for single filers and $25,000 for joint filers, the deduction is reduced as follows. Calculate the amount by which MAGAI exceeds the threshold, either 150,000 or the 300,000. Divide this excess by $1,000, rounding up to the next whole number if there’s any remainder.
Multiply the result by $100 and subtract this amount from the otherwise allowable deduction, but not below zero. All right, so let’s show you some numbers. Let’s say that you have a single filer and they have a qualified overtime compensation of $12,500.
Their MAGAI is 170. So it’s over the threshold, okay? So you’re gonna subtract the 170 from the threshold of 150 and you have 20,000 that remain. 20,000 divided by 1,000 is 20.
So you multiply the 20 times 100 and that’s $2,000. So we look at the allowable deduction, 12,500, subtract the 2,000 and you’re left with 10,500. Let’s look at an example in a joint return.
So say the qualified overtime compensation is 25,000, but their MAGAI is 350, 350,000. So the excess over the threshold is 50,000 because you take the 350 minus the 300. 50,000 divided by 1,000 is 50.
50 times 100 is 5,000. So the allowable deduction is the 25,000 minus the 5,000, leaving you at 20,000. This is a temporary law for now.
That means it’s essential to plan, but also watch out for updates and the IRS guidance on implementation. So here are three practical steps to take now. One, talk to your payroll vendor.
Make sure that they know the new rules and can tag qualified overtime correctly. Two, communicate to the staff. Teach the employees that a tax deduction may not instantly change their take-home pay unless withholding is adjusted.
Number three, consult with a tax pro because things can get a little confusing. Bottom line, the OBBVA provides limited federal deduction on certain overtime pay, not a blanket, no tax exemption. It’s a helpful change for many workers, but it comes with caps, definitions, and implementation details.
Stay informed, plan ahead, and get professional help so you can maximize the benefit while staying compliant. Thanks for watching. Please subscribe and hit the notification bell if you haven’t already, and practical tips will be coming your way every week.
If you found this helpful and you wanna keep learning, click on the video on your screen, and I’ll see you there. God bless you.
SUMMARY
Understanding the “No Tax on Overtime” Deduction
The One Big Beautiful Bill Act (OBBBA), recently signed into law, promises relief for hardworking Americans by creating a temporary deduction for overtime pay between 2025 and 2028. While headlines claim there’s “no tax on overtime,” the truth is more nuanced. The new law doesn’t make overtime tax-free; instead, it allows workers to deduct part of their overtime earnings when filing their federal taxes.
How the OBBBA Deduction Works
Under new Internal Revenue Code Section 225, individual taxpayers can deduct up to $12,500 (or $25,000 for joint filers) per year in qualified overtime compensation. This deduction applies to both employees and self-employed individuals who work overtime under the Fair Labor Standards Act (FLSA) — that means it covers the “half” portion of time-and-a-half pay earned after 40 hours a week.
Interesting Fact: According to the Bureau of Labor Statistics, over 32 million Americans work overtime hours each year, meaning this deduction could collectively save workers billions of dollars in taxable income between 2025–2028.
Who Qualifies for the Deduction
Eligibility depends on a few critical rules:
- Workers must report their overtime on a W-2 or 1099 form.
- Married couples must file jointly to receive the full deduction.
- The deduction phases out for taxpayers earning more than $150,000 (single) or $300,000 (joint). For every $1,000 above those limits, the deduction drops by $100.
- Tips don’t qualify under this rule — there’s a separate OBBBA deduction for tips.
What It Means for Your Paycheck
Despite the catchy “no tax on overtime” phrase, overtime wages are still subject to payroll tax withholding (income tax, Social Security, and Medicare) when paid. The benefit shows up later at tax time, when you file your return and claim the deduction.
For example, if you earn $15,000 in overtime pay, a single filer can deduct up to $12,500, saving around $2,750 if they’re in the 22% tax bracket. The rest ($2,500) remains taxable.
This deduction reduces taxable income, not the actual tax bill — so while you’ll still see withholdings on each check, you could get a bigger refund or smaller balance due when you file.
Reporting and Compliance Requirements
Employers must report qualified overtime pay on information returns (like W-2s or 1099s). The IRS will issue guidance and provide transitional relief in 2025, meaning they won’t penalize companies harshly in the first year as they adjust payroll systems.
However, businesses must ensure accurate reporting and clear communication with employees. Employers should tag overtime correctly and inform workers that changes in take-home pay won’t be immediate unless W-4 withholdings are adjusted.
Key Limits and Calculations
Let’s break down an example for clarity:
- Single Filer Example:
- Qualified overtime pay: $12,500
- MAGI (Modified Adjusted Gross Income): $170,000
- Threshold: $150,000 → $20,000 over
- Reduction: 20 × $100 = $2,000
- Final Deduction: $10,500
- Joint Filer Example:
- Qualified overtime pay: $25,000
- MAGI: $350,000
- Threshold: $300,000 → $50,000 over
- Reduction: 50 × $100 = $5,000
- Final Deduction: $20,000
What Employers Should Do
Employers must work closely with their payroll vendors and tax advisors to ensure compliance. Here’s what to do now:
- Update payroll systems to track qualified overtime pay.
- Educate employees on how this deduction works and when they’ll see the benefit.
- Consult professionals to ensure proper reporting and to maximize savings under the law.
Temporary but Impactful
The OBBBA deduction only applies for tax years 2025 through 2028, unless Congress extends it. That means now is the time to plan — especially for workers who regularly log overtime or businesses with hourly employees.
Final Takeaway
While “no tax on overtime” sounds like a tax-free payday, the reality is more practical: it’s a federal income deduction, not an exemption. Workers will still pay taxes throughout the year but can look forward to larger refunds or reduced taxes come filing season.
For businesses, this law means new reporting responsibilities but also an opportunity to boost morale among overtime workers.
Learn More
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About FREEDOMTAX ACCOUNTING
For over 20 years, FREEDOMTAX ACCOUNTING has guided individuals and businesses through every major tax reform. We specialize in tax preparation, accounting, financial planning, and business strategy across Florida. Our experts translate complex tax law into practical solutions that save you time and money.
To learn how these changes affect your paycheck or payroll, call FREEDOMTAX ACCOUNTING today or visit https://freedomtaxaccounting.com.
