A Fresh Tax Break for Hourly Workers
Starting in 2025, hourly employees who regularly work overtime can take advantage of a new federal deduction that reduces taxable income. Introduced under the One Big Beautiful Bill Act (OBBBA), this benefit runs through 2028, providing four consecutive years of potential tax savings. (irs.gov)
Understanding the Overtime Deduction
The deduction applies to the “premium” portion of overtime pay — the extra half of your time-and-a-half rate mandated by the Fair Labor Standards Act (FLSA). Key points:
- Deduct up to $12,500 individually or $25,000 if filing jointly. (gov)
- Applies to tax years 2025–2028. (gov)
- Classified as an above-the-line deduction, so even standard deduction filers can claim it. (gov)
This deduction is designed to reward hardworking employees for putting in extra hours by lowering their federal tax burden.
Who Can Qualify?
You may be eligible if you:
- Are a non-exempt, hourly employee covered under FLSA. (com)
- Work more than 40 hours per week and receive overtime pay. (thomsonreuters.com)
- Earn less than $150,000 (single) or $300,000 (joint) in modified adjusted gross income. (gov)
- Have a valid Social Security number, and your employer accurately reports your overtime on your W-2. (gov)
If all of these apply, you could see meaningful annual tax savings.
How to Claim the Overtime Deduction
Steps to claim your deduction:
- Check your W-2 – For 2025, your employer should report qualified overtime separately (Box 14 or supplemental statement). (gov)
- Include the deduction on your tax return – It’s an above-the-line deduction that reduces your AGI, whether you itemize or not. (gov)
- Maintain records – Keep pay stubs and employer statements for verification.
- Confirm payroll updates – Ensure your employer’s system will report overtime properly under the new rules. (gov)
A few minutes of preparation now can save hundreds or even thousands in taxes later.
Why It Matters
This deduction allows employees to retain more of their earned overtime. For example, if you earn $10,000 in overtime, you could deduct $5,000 (the “premium” portion), reducing taxable income and potentially saving hundreds in federal taxes.
FAQs About the Overtime Deduction
- Do I need to itemize deductions?
This is an above-the-line deduction, claimable even with the standard deduction. (irs.gov) - Are salaried employees eligible?
Only non-exempt hourly employees who receive overtime under FLSA qualify. (quarles.com) - When can I claim the deduction?
On your 2025 tax return, filed during the 2026 filing season. It remains available through 2028. (gov)