On July 4, 2025, Congress enacted US Public Law 119-21, also known as the One Big Beautiful Bill Act. In that law, there is a provision called “No Tax on Overtime.”
Tax Tip 2026-06, Jan. 26, 2026 — The One, Big, Beautiful Bill has a significant effect on federal taxes, credits and deductions. Millions of taxpayers reported earning tips and overtime on their tax returns, many of them are veterans and people working in lower wage jobs. This relief will impact most of these taxpayers and they can start taking advantage of the deduction this filing season.
Learn how the new “no-tax on overtime” deduction under Code §225 works for tax years 2025–2028, including eligibility rules, income limits and deduction caps. This article also explains IRS transition guidance, reporting relief for 2025, and what types of overtime pay qualify under the FLSA.
The “No Tax on Overtime” provision is a new federal income tax deduction introduced by the One Big Beautiful Bill Act, signed into law on July 4, 2025. It allows eligible workers to deduct the premium portion of their overtime pay from their federal taxable income, helping reduce their overall tax bill.
Sure, you’re not likely to hear employees complain about paying less in taxes. But what does this new tax law actually mean for how you handle overtime in payroll? Let’s break down the “no tax on overtime” rule and how it impacts your employees on payroll.
Did the no tax on overtime pass? Yes. The no tax on overtime bill was included in the One Big Beautiful Bill that President Trump signed into law in July 2025. This new law creates a first-of-its-kind tax exemption for certain overtime pay, effective beginning in tax year 2025.
President Trump signed H.R. 1, the One Big Beautiful Bill Act, into law on July 4, 2025. The tax provisions of the One Big Beautiful Bill Act (OBBB) include both extensions of expiring Tax Cuts and Jobs Act (TCJA) provisions and brand-new tax cuts.
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