The Fine Print Behind Trump’s 'No Tax on Overtime' Break
President Donald Trump’s “no tax on overtime” promise sounds like a welcome reward for staying late: More money to cover groceries, catch up on bills or finally get ahead.
The IRS tax rules are less generous than the slogan, however. The deduction generally only covers the extra half of qualifying time-and-a-half pay, meaning payroll taxes still take their cut.
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Workers counting on a windfall will need a closer look at how much of that promise reaches their pockets. Let's dive into it.
Who Qualifies for It
Hourly workers and some salaried employees can qualify if federal law requires their employer to pay them overtime. No itemizing required. Workers taking the standard deduction can claim the break, too, according to the IRS.
“I would not take the slogan literally,” said Chad Cummings, a CPA and attorney.
He explained that extra pay owed only under a union contract, state law or company policy doesn’t qualify. The overtime must be required by the Fair Labor Standards Act.
Two more requirements include a Social Security number valid for employment and a joint tax return for married claimants.
Which Pay Actually Counts
Only the extra half of federally required time-and-a-half pay added to the regular hourly rate qualifies for the deduction, explained Logan Allec, a CPA and owner of PayrollSignal, a payroll services company.
Here’s how that works: A worker normally earns $20 an hour, but gets $30 for an overtime hour. The first $20 still faces the usual taxes. From there, only the extra $10 can qualify for the federal income tax deduction.
That doesn’t mean the worker gets another $10. The savings come from reducing the federal income tax owed on that $10. Social Security and Medicare taxes still apply.
Even if the employer pays double time, only the extra $10 required by federal law qualifies, Allec said.
How Much Workers Can Deduct
Eligible workers can deduct up to $12,500 a year, or $25,000 for married couples filing jointly, explained Roxanne Hendrix, a CPA and tax expert with JustAnswer. However, a $12,500 deduction doesn’t mean $12,500 back from the IRS. It lowers the amount of income used to calculate federal income tax.
Hendrix gave this example: A worker claiming a $5,000 deduction at a 22% federal tax rate would save $1,100.
Higher income can also shrink the deduction. According to the IRS, it starts decreasing when modified adjusted gross income exceeds $150,000, or $300,000 for joint filers. Those limits apply to income overall, not just overtime earnings.
Which Taxes Still Apply
The deduction only affects federal income taxes. Social Security and Medicare taxes still apply to overtime pay.
“The overtime wages remain reportable and subject to federal income-tax withholding and payroll taxes,” said Adham Abadier, a CPA and founder of Catalyst CPA Corporation.
State income taxes may take a cut, too. Abadier pointed to California, where workers receive no matching state deduction. The federal break can lower the tax bill, but it doesn’t make the whole overtime payment tax-free.
When Savings Show Up
Workers have two ways to receive the benefit: Take home more money during the year or claim the deduction when they file their tax return.
“Employees who want withholding adjusted to account for the deduction may submit an updated Form W-4, Employee’s Withholding Certificate,” said Lou Fuoco, a CPA and managing director of The Fuoco Group.
With that update, payroll can take the expected deduction into account and withhold less federal income tax. Workers who leave their withholding unchanged can claim the deduction when filing.
The break applies to tax years 2025 through 2028, Fuoco said. Congress would have to extend it for workers to claim it beyond that.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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