Understanding the Tax Deduction on Federally Required Overtime Pay
President Donald Trump's promise of a 'no tax on overtime' break is more nuanced than it appears. The IRS allows eligible workers to deduct part of their federally required time-and-a-half pay, but not all taxes are waived—Social Security and Medicare still apply. Hourly employees who qualify under the Fair Labor Standards Act can claim up to $12,500 annually in deductions (or $25,000 for joint filers), which reduces federal income tax liability rather than providing a direct cash refund. The deduction is limited to the extra half of overtime pay required by law and does not apply if overtime was mandated only under union contracts or company policies. Tax savings depend on individual marginal rates; for example, a $5,000 deduction at 22% tax rate saves about $1,100. The benefit is available from 2025 to 2028 and requires an updated W-4 form if workers want the adjustment reflected in their paychecks. Workers should also note that state taxes may still apply—California does not offer a matching deduction—and higher incomes reduce eligibility as modified adjusted gross income exceeds $150,000 for individuals or $300,000 for joint filers.
Topics: labor law overtime pay taxation