No Tax on Overtime Act Clarifies Which Extra Hours Count for Tax Breaks Starting in 2025

The aptly named No Tax on Overtime for All Workers Act is short and sweet, focusing on one thing: making sure that when you work extra hours, the pay you get for that effort is treated favorably when tax season rolls around. Specifically, Section 2 updates the tax code to clearly define “qualified overtime compensation,” which is the money that would be eligible for a deduction.

The Take-Home Pay Boost

This bill essentially formalizes what kind of extra pay counts as deductible overtime, effective for tax years starting after December 31, 2024. First, and most importantly, it covers the standard overtime mandated by the Fair Labor Standards Act (FLSA)—that time-and-a-half you get when you punch more than 40 hours in a week. If you’re a construction worker, a retail manager, or anyone else getting FLSA overtime, this provision ensures that pay is officially designated for a deduction. This is a clear win for the millions of hourly workers who rely on overtime to make ends meet, potentially increasing their take-home pay by reducing their tax liability on those extra hours.

The Negotiated Overtime Clause

But the bill doesn't stop at FLSA. It also includes extra pay you receive above your regular rate if it’s based on a prior agreement with your single employer for work exceeding a standard schedule. The key here is the agreement: you and your employer must have decided beforehand that the work was beyond a standard work week of at least 40 hours over seven days. This provision is designed to capture those specific employment contracts where extra pay is negotiated for long hours, even if it doesn't strictly fall under FLSA rules. Think of a salaried worker who isn't technically covered by FLSA but has a contract that guarantees premium pay for working beyond 50 hours a week—that negotiated premium pay could now qualify for the deduction, provided the agreement is in place.

What About the Fine Print?

The fact that this bill relies on a clear definition of “qualified overtime compensation” is where things get interesting. While the FLSA part is straightforward, the second category—the negotiated extra pay—requires a clear, pre-work agreement. This could create some fuzziness. For instance, if you’re a small business owner who sometimes pays an employee extra 'bonus' money for working late without a formal, written agreement defining it as premium pay for exceeding 40 hours, that money might not qualify. The bill is trying to benefit those who work hard, but you need to make sure your employment contract or agreement is explicitly structured to meet the new tax code definition.

There’s also a specific carve-out for employees covered by the Railway Labor Act, ensuring their extra pay for work beyond scheduled or maximum allowed hours also counts. Ultimately, this bill is good news for anyone clocking extra hours, making those late nights and weekend shifts a little more financially rewarding starting in 2025. It’s a direct attempt to put more money back into the pockets of the people who are already putting in the extra effort.