After Congressional approval, the President has signed into law the Overtime Pay Tax Relief Act of 2025 (H.R.561). This is a federal income tax deduction, not a complete exemption from all taxes on overtime. The Bill allows eligible workers to deduct up to $12,500 of overtime pay ($25,000 for joint filers) from their federal taxable income for tax years 2025 through 2028. While this could lower what many workers owe the IRS, the taxes would still come out of your paycheck as usual. You will only see the savings when you file your return.
This new provision pertains to the overtime premium (1.5) portion above your normal rate that you earn for overtime hours. For example, if your standard wage is $20/hour and your overtime rate is $30/hour, then the premium portion you can deduct is the $10 per hour. This is an “above-the-line” deduction, meaning you do not have to itemize to take advantage of this deduction. The deduction phases out for high earners ($150,000 for single filers and $300,000 for joint filers). Exempt employees (Grades 21+) are not eligible to take advantage of this deduction.
For additional guidance, please consult your tax advisor.
