This bill creates a tax deduction for qualified overtime pay, capping the exclusion at 300 hours annually, subject to income phase-outs starting at $100,000 MAGI.
Nathaniel Moran
Representative
TX-1
The No Tax on Overtime Act creates a new federal income tax deduction for qualified overtime pay earned by workers. This exclusion is capped at 300 hours of overtime service per year, with the benefit phasing out for higher earners. Employers will be required to report this tax-free compensation on W-2 forms, and the changes apply to tax years beginning after December 31, 2024.
No Tax on Overtime Act: Tax Break Proposed for First 300 Hours of Overtime Starting 2025
The “No Tax on Overtime Act” is designed to put more cash in the pockets of workers who rely on extra hours. Essentially, this bill creates a new income tax deduction for what it calls “qualified overtime compensation.” This is the premium pay you earn for working hours beyond the standard workweek, specifically defined by the Fair Labor Standards Act (FLSA). The provision kicks in for tax years starting after December 31, 2024, meaning you could see the benefit starting with your 2025 earnings.
The 300-Hour Rule: What’s Covered?
If you’re working those extra shifts, this bill says you won't have to pay federal income tax on the premium portion of that overtime pay—but there are firm limits. The deduction is capped at the overtime compensation earned for a maximum of 300 hours of service per year. Think of it like this: if you’re a construction foreman or a nurse who puts in 400 hours of overtime in a year, only the first 300 hours of that premium pay gets the tax break. Crucially, if you file jointly with a spouse, that 300-hour limit applies to each of you individually, which is a nice win for dual-income households relying on overtime.
The $100K MAGI Cliff
This tax benefit isn't for everyone, especially those pulling in high incomes. The deduction starts disappearing if your Modified Adjusted Gross Income (MAGI) goes above $100,000. For every $1,000 you earn over that threshold, your total deduction amount is reduced by $100. This structure means the tax break is primarily focused on middle-income workers who often rely on overtime to make ends meet. If you’re well above that $100,000 mark, the benefit quickly phases out, or disappears entirely. For the average worker, this means more take-home pay without having to adjust their W-4, provided the IRS updates its withholding tables as required by the bill.
New Paperwork for Paychecks
While this is a benefit for employees, it creates a new administrative task for employers. To make this work, employers will now have to specifically track and report the total amount of this “qualified overtime compensation” on your W-2 form. This is a significant change in payroll reporting. Furthermore, the IRS is mandated to update its withholding tables and procedures. This is key because it means employers should be able to account for this deduction before you file your return, leading to slightly less tax taken out of those overtime paychecks throughout the year, rather than just getting a bigger refund later. If you claim the deduction, you must provide the Social Security Number of the person who earned the overtime—a standard requirement the IRS can quickly verify.