No Tax On Overtime Explained

Forbes

3 days ago

WASHINGTON, DC - JULY 04: U.S. President Donald Trump, joined by Republican lawmakers, signs the ... More One, Big Beautiful Bill Act into law during an Independence Day military family picnic on the South Lawn of the White House on July 04, 2025 in Washington, DC. After weeks of negotiations with Republican holdouts Congress passed the One, Big Beautiful Bill Act into law, President Trump's signature tax and spending bill. The bill makes permanent President Donald Trump's 2017 tax cuts, increase spending on defense and immigration enforcement and temporarily cut taxes on tips, while cutting funding for Medicaid, food assistance and other social safety net programs. (Photo by) Getty Images
Should working longer hours mean keeping more of your paycheck? The Trump administration and authors of the One Big Beautiful Bill Act (OBBBA) seemed to answer in the affirmative. Starting in 2025, a large chunk of overtime pay will not be subject to federal income tax.
It's a populist-sounding provision with bipartisan support or, put differently, an easy applause line in a hard economy. But, if you peel back the campaign slogans, the policy raises some deeper questions about fairness, labor markets, and whether the tax code should play favorites with how we work.
To be clear, the 'no tax on overtime' policy isn't really a blanket exemption on overtime pay—it's a deduction, capped at $12,500 for individuals and $25,000 for married couples filing jointly. It applies only to qualified overtime compensation under the Fair Labor Standards Act (FLSA), meaning the time-and-a-half pay earned by non-exempt workers—generally hourly employees making less than $35,568 per year.
It isn't the full overtime amount that is deductible, it's the extra compensation over regular wages. So, if you make $20 an hour and $30 in overtime, only that $10-per-hour difference counts. The deduction phases out incrementally above $150,000 in individual income and the entire provision sunsets in 2028—though it has a good chance of becoming politically permanent.
Despite the campaign trail framing, this isn't a windfall for most workers. The biggest winners are going to be middle-income workers who work significant overtime and still owe federal income taxes after the standard deduction and other credits.
Many low-wage workers—especially those with dependents—already have little to no federal income tax liability owing to the expanded standard deduction and child tax credit. For them then, this deduction is worthless. But if you imagine a single factory worker putting in 50-hour weeks at $22 per hour, the difference could be hundreds of dollars. In practice, this is a modest tax break for a very specific demographic of working-class voter.
Assuming that factory worker regularly worked ten hours in overtime, they'd be able to deduct about $5,700 from taxable income at the end of the year. That isn't a credit, mind you, it is just what will be deducted from their total income of about $62,900. If you crunch the numbers, the provision will save that factory worker about $900 per year in tax liability.
On paper, and as a political plank, this policy rewards hard work. In practice, it is a subsidy for a particular kind of work: hourly, eligible-for-overtime, and just tax-liable enough. In other words, a tax subsidy for financial precarity.
Here is where things start to get distortive. Two workers each earning the same $62,900 per year could face very different tax bills depending on how their income is structured—say, one salaried and the other hourly with overtime. That violates the concept of horizontal equity, the idea that similarly situated people should be taxed similarly. This deduction suggests we want to tax based on effort, not earnings.
It also sets up some predictable behavioral incentives on the part of employers. They are already playing cat-and-mouse with overtime classification rules—now they have a real reason to game it. Lower base wages, more overtime hours, and absolutely no additional cost to the firm. Workers' incentives will be aligned, and they may find themselves chasing longer shifts to qualify for the deduction.
Economically, subsidizing overtime doesn't create jobs—it actually destroys them on paper. When existing workers are pressed to work longer hours, employers have less need to hire on additional staff. A 50-hour week for one employee can be replaced by tacking on an additional ten hours across five separate workers. The overtime deduction thus may boost take-home pay for some, but it does so by encouraging a labor distribution that concentrates hours in the hands of fewer people.
In strict policy terms, this is a stealth anti-job creation measure. Policy Tradeoffs and the Politics That Drive Them
At $89 billion over ten years, the 'no tax on overtime' provision is more of a rounding error as against the $3 trillion OBBBA cost . And yet, each rounding error comes at the expense of something else.
The money spent on the OBBBA could've expanded the Earned Income Tax Credit, or funded a refundable childcare benefit. It could have boosted wages through direct support. Instead, we've chosen to reward more hours, not better jobs. And, contrary to campaign spin and political bluster, this won't expand the labor market—economically, it's closer to a job killer.
The politics, however, are easy. Subsidizing 'hard work' polls well and cuts cleanly across partisan lines. It plays to a cultural narrative, a Horatio Alger story, that values hustle over balance. Republicans can call it a reward for effort, and Democrats can back it for working-class symbolism, if not effects.
No one is eager to point out that the federal government just made overtime the most tax-advantaged income in America.