No Tax on Overtime Deduction - Guidance on Temporary Tax Deductions for Overtime Included in the One Big Beautiful Bill Act of 2025 - January 2026

Sep 19, 2026

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Report provides practical, employer-facing guidance on the temporary federal income tax deduction for qualifying overtime compensation under Section 70202 of the One Big Beautiful Bill Act of 2025. It explains eligibility limits for non-exempt, FLSA overtime and distinguishes deductible overtime premium from the regular rate portion. The document outlines key definitions, effective dates and claiming window through the 2028 tax year, and stresses employer recordkeeping for accurate payroll and year-end tax reporting (e.g., W-2s).

LanguageEnglish

CategoryLetters

FormatPDF

Pages12

Reading Time4 min

AccessFree to download

Executive Summary

Introduction

MTAS Recommendations

What is the “No Tax on Overtime” deduction provision?

Effective Date of the Act and Timeline

Key Definitions

Deductible Overtime Qualifications

Employee Eligibility

FAQs

Conclusion

Reference List

“No Tax on Overtime” Deduction Guidance on the Temporary Tax Deductions for Overtime Included in the One Big Beautiful Bill Act of 2025 Contributors: Hal Boyd, MTAS Legal Consultant Steven Cross, MTAS Technical Consulting Program Manager David Moore, MTAS Police Management Consultant Donald Pannell, MTAS Fire Management Consultant Eric Spencer, MTAS Finance & Accounting Program Manager Jeff Stiles, MTAS Police Management Consultant Peter Voss, MTAS Human Resources Consultant January 2026 Executive Summary ........................................................................................................................................... 3 Introduction ........................................................................................................................................................... 3 MTAS Recommendations.................................................................................................................................4 What is the “No Tax on Overtime” deduction provision? ...................................................................4 Effective Date of the Act and Timeline ...................................................................................................... 5 Key Definitions ..................................................................................................................................................... 5 Deductible Overtime Qualifications ............................................................................................................. 5 Employee Eligibility............................................................................................................................................ 6 FAQs ........................................................................................................................................................................ 6 Conclusion ............................................................................................................................................................. 9 Reference List.......................................................................................................................................................11 Executive Summary The “No Tax on Overtime” provision is included in Section 70202 of the One Big Beautiful Bill Act which became law on July 4, 2025. It allows certain hourly employees to lower their federal income taxes on part of the overtime pay they earn through a deduction. This applies only to non-exempt employees who earn overtime under the federal Fair Labor Standards Act (FLSA) . Employees can start claiming this tax deduction on their federal tax returns for tax years 2025 until it expires after the 2028 tax year. The deduction does not apply to all overtime pay. It only applies to the extra premium portion of FLSA overtime – often referred to as the “half” in “time-and-a-half.” For a simplified example, if an employee is compensated at a regular rate of $20 per hour and is paid $30 per hour for overtime, only the extra $10 per hour overtime premium may count toward the tax deduction. The $20 regular rate portion is still taxable. Employees who claim this deduction may owe less in federal income taxes. If they do not claim it, the overtime pay is taxed like normal income. Either way, employees must still pay Social Security and Medicare taxes, as well as any state or local taxes, on all overtime pay. Those taxes are not affected by this law. While ‘‘No Tax on Overtime” sounds all encompassing, it is not. The Act does not cover all types of overtime or extra pay. Only overtime that is required by the FLSA qualifies. Overtime paid because of state law, a labor agreement, or an employer’s own policy does not qualify. Other types of pay, such as on-call pay, stand-by pay, or similar premiums, are also not eligible. For local government employers moving forward, the key responsib

FAQs

What payroll and reporting actions must local government employers take?

Employers must accurately track and report FLSA-required overtime separately from other compensation to ensure payroll records and year-end tax forms (such as W-2s) are correct.

Sep 19, 2026

Upload by Quinn