No Tax on Overtime Act: Overtime Pay Could Be Tax-Free Starting in 2025

This proposed legislation, simply titled the No Tax on Overtime for All Workers Act, aims to change the federal tax code dramatically for anyone earning overtime pay. Essentially, it creates a new category of income called "qualified overtime compensation" that would be exempt from federal income tax, starting with tax years that begin after December 31, 2024.

The Takeaway: More Money in Your Pocket

What does this mean in real terms? If you’re one of the millions of people who clock extra hours, this bill is designed to increase your take-home pay without increasing your gross wages. The idea is to stop taxing the extra income you earn when you work past your standard schedule. Think about that construction worker who puts in 10 hours a day to meet a deadline, or the nurse who picks up an extra shift—their overtime check would suddenly look a lot bigger because the federal government wouldn't be taking a cut.

Defining “Qualified Overtime”: The Fine Print

The bill defines two main ways your overtime pay qualifies for this tax break under Section 225(c)(1) of the Internal Revenue Code. First, it covers the standard overtime required by the Fair Labor Standards Act (FLSA), which is pay received at a rate of at least one-and-a-half times your regular hourly rate. This is the most common type of overtime, and it’s straightforward.

Second, it covers pay for extra hours worked under a prior agreement with your employer—either a collective bargaining agreement or a specific contract. This agreement must establish a standard work week of at least 40 hours over a 7-day period. This provision is interesting because it allows negotiated agreements to also benefit from the tax exemption, even if the pay structure isn't exactly 1.5x, as long as it compensates for hours beyond the agreed-upon standard.

When the Clock Starts Ticking

For those hoping for an immediate boost, hold your horses. The bill specifies that these tax changes only apply to tax years beginning after December 31, 2024. So, if passed, you wouldn't see this reflected until the 2025 calendar year, impacting the taxes you file in 2026. For payroll departments, this means a significant shift in how they calculate withholdings for qualifying overtime compensation starting in January 2025.

The Trade-Off: Who Pays for the Break?

While this is clearly a huge win for the worker—making that decision to work extra hours much more financially rewarding—it's important to remember that tax breaks come with a cost. If the federal government stops collecting income tax on all this overtime pay nationwide, that money has to come from somewhere, or federal revenue simply drops. The primary group negatively impacted here is the U.S. Treasury, which will see a reduction in tax revenue. This is the classic trade-off in tax policy: increased cash flow for individuals versus reduced funding for federal programs.