No Tax on Overtime? Understanding the New Deduction with Upcloud Accounting
Published Date: July 14, 2025
Published By: Jac Cantos, Upcloud Accounting
Working overtime? There's good news! A new tax break, the "no tax on overtime" deduction, could put more money back in your pocket starting in 2025. Upcloud Accounting explains this new benefit and how to claim it.
The New "No Tax on Overtime" Deduction: What You Need to Know
A provision in the One Big Beautiful Bill (also called The Working Families Tax Cuts) creates a new tax exemption for certain overtime pay, effective for the 2025 tax year.
Key Facts About the "No Tax on Overtime" Deduction
Effective Date: Starts with the 2025 tax year (filed in early 2026).
Temporary: Currently scheduled to remain in place through the end of 2028.
Deduction Amount: You can deduct up to $12,500 of qualified overtime compensation per year ($25,000 if filing jointly).
Deduction Type: Above-the-line deduction (you don't need to itemize). It directly lowers your Adjusted Gross Income (AGI).
Social Security Number (SSN): You must have a valid SSN to claim the deduction.
Filing Status: Married filing separately taxpayers are not eligible.
Income Limit (MAGI): Deduction phases out for those with a Modified Adjusted Gross Income (MAGI) above $150,000 ($300,000 for joint filers).
For every $1,000 over the MAGI limit, the deduction is reduced by $100.
Time-and-a-Half Portion Only: Only the "extra" half above your base rate qualifies.
Tips During Overtime: Tips earned during overtime hours do not qualify.
Who Qualifies for the "No Tax on Overtime" Deduction?
Applies to most taxpayers who receive overtime wages under the Fair Labor Standards Act (FLSA).
Hourly and other non-exempt employees are eligible.
Exempt salaried employees generally do not qualify.
You must have overtime earnings paid at a higher rate than your regular wages.
A valid Social Security number is required.
It's unclear if self-employed workers will qualify.
How Much Overtime Pay Can Be Deducted?
Up to $12,500 on a single return, or $25,000 if filing jointly.
Applies only to the "extra" portion of your overtime compensation.
2025 Safe Harbor Rule
For 2025 only, employers can average your overtime hours from July to December to calculate your deduction.
Reporting Requirements for Overtime Pay
Employers must separately report overtime wages on Form W-2 and other IRS tax statements.
In 2025, employers will likely use a temporary reporting method (Box 14 or a separate statement).
Starting in 2026, the IRS plans to add a specific box to Form W-2 for overtime wages.
Example: Calculating the Overtime Deduction
Maria earns $20/hour and works 10 overtime hours per week at $30/hour.
Only the extra $10/hour counts toward the deduction.
Deductible overtime: $100/week.
Annual deductible overtime: $5,200.
Navigating the new "no tax on overtime" deduction can be complex. Upcloud Accounting provides expert guidance to ensure you claim all eligible deductions and optimize your tax savings.
Upcloud Accounting: Virtual Outsourced Accounting and Bookkeeping Services in the Philippines
Upcloud Accounting provides reliable, tech-enabled virtual accounting and bookkeeping services designed for startups, freelancers, and growing small businesses across the United States. Our team of experienced accountants and bookkeepers delivers streamlined financial management so you can focus on scaling your business, without worrying about the back-office workload.
We specialize in increasing efficiency, automation, and transparency across your financial operations using modern cloud accounting tools. Whether you're a solo entrepreneur or an expanding company, our flexible and affordable bookkeeping plans ensure you get expert support at every stage of growth. For inquiries, contact our team at [email protected] or visit www.upcloudaccounting.com to learn more.
Disclaimer: This content is for general informational purposes only and should not be considered professional financial or legal advice. For guidance tailored to your specific business needs, please consult with a licensed accountant or tax advisor. For questions, comments, or feedback, feel free to email us at[email protected].
