07/10/2025
No Tax on Overtime: How it works
-Only the extra .5 kicker counts. If your regular rate is $30/hour and your OT rate is $45/hour, then only the extra $15 per hour counts towards the deduction.
-The maximum deduction is $12,500 ($25,000 if married filing joint)
-Only OT required to be paid pursuant to the FLSA (Fair Labor Standards Act) counts. OT paid because of different state law requirements, like California, or because of a collective bargaining agreement, or for any other reason that differs from the FLSA is irrelevant and will require a separate accounting.
-The FLSA requires OT when working over 40 hours per week, unless exempt.
-If you get OT paid because your company has a different OT structure than what the FLSA requires, then the company will need to do a separate accounting of your OT to determine how much, if any, would be FLSA OT and qualify for the deduction. So if you get OT for working more than 8 hours in a day, that doesn't count unless you actually work more than 40 that week.
-Pay that is exempt from the FLSA OT requirements, salaried employees, owner's, etc, doesn't count.
-There will be a new line item on your W2 to report the amount of qualified OT paid during the year. You don't qualify for the deduction if it isn't reported on your W2.
-This is a tax deduction, not an exclusion from income. Your OT is still included in your W2 income and reported on your tax return. Your paycheck wont change this year. You'll get a tax deduction on your tax return for qualified OT. For 2026, Treasury has been instructed to modify the payroll tax tables to account for the deduction on your paycheck by reducing your federal withholding.
-You get the deduction even if you don't itemize.
-The deduction is only for federal income taxes. You will still pay social security, medicare & state taxes on your OT (unless your state automatically follows federal law; Wisconsin doesn't).
-OT retroactive to 1/1/2025 counts.
-To get the full deduction your income must be less than $150,000 ($300,000 if married filing joint).
-If income is above those thresholds, the deduction phases out by 10% of the excess over those thresholds that your income ends up at. So if income is $10,000 over the threshold, then you lose $1,000 of the deduction.
-If you're married on 12/31 then you must file a joint return to qualify.
-The deduction is currently slated to last 4 years and will go away in 2029.
-Treasury has been instructed to come up with regulations or additional guidance to prevent this deduction from being abused so further limitations could be forthcoming.
