Due to changes introduced in the One Big Beautiful Bill, for tax years 2025 through 2028, employees who earn overtime pay may qualify for a new federal income tax deduction on a portion of that income. The provision allows eligible workers to deduct up to $12,500 of overtime pay per year (or up to $25,000 for joint filers), reducing their federal taxable income.
This change applies only to federal income tax. Overtime wages are still subject to payroll taxes, including Social Security and Medicare, as well as applicable state and local taxes. Employers must continue to report overtime pay as wages, and employees must still accurately report their earnings.
For workers who regularly earn overtime, this deduction may help offset the higher tax impact that often comes with increased earnings. That said, because the rule is temporary, it should be viewed as a short-term tax benefit rather than a permanent change to how overtime is taxed.
After 2028, the deduction is scheduled to expire unless lawmakers extend it. That uncertainty means employees should avoid long-term financial commitments based solely on this tax break. As with many temporary tax provisions, the safest approach is to enjoy the benefit while it exists, but plan for the possibility that overtime pay will return to its previous federal tax treatment in future years.
Whether you’re an employee or an employer, understanding short-term tax changes is key to long-term planning. Filipek & Co. provides personalized tax guidance to help you stay compliant, minimize surprises, and plan beyond temporary provisions. Contact us to learn more.
