Overtime Pay Tax Relief Act of 2025 Caps Deductions at 20% of Base Wages for Eligible Workers

The Overtime Pay Tax Relief Act of 2025 aims to let workers keep more of their hard-earned overtime pay by making it tax-deductible. Under Section 2, if you earn overtime pay that is legally required under the Fair Labor Standards Act (FLSA), you can subtract those earnings from your taxable income. There is a specific limit: the deduction cannot exceed 20% of the regular, non-overtime wages you earned from that same employer during the year. This effectively treats a significant chunk of your extra hours as tax-free income, potentially lowering your overall tax bracket.

The Income Cutoff and the Clock

This benefit isn't open to everyone. The bill sets strict income thresholds to ensure the relief targets middle- and lower-income earners. You are ineligible for this deduction if your adjusted gross income (AGI) exceeds $100,000 as a single filer, $150,000 as a head of household, or $200,000 for married couples filing jointly. Additionally, this isn't a permanent change to the tax code; the bill includes a 'sunset' provision, meaning the deduction will expire for any overtime received after December 31, 2029.

Impact on Your Paycheck and Tax Return

You won't have to wait until tax season to see the difference. The bill requires the Secretary of the Treasury to update withholding tables, meaning employers will adjust how much tax they take out of your check in real-time. For a construction worker or a nurse picking up extra shifts, this could mean a noticeable bump in take-home pay immediately. Furthermore, the bill ensures this is an 'above-the-line' style benefit; per the amendments to Sections 63 and 67 of the Internal Revenue Code, you can claim this deduction even if you take the standard deduction rather than itemizing.

Real-World Mechanics and Limits

To see how this works, imagine a retail manager earning $50,000 in base salary who picks up holiday shifts totaling $15,000 in overtime. Since $10,000 is 20% of their base salary, they could deduct $10,000 from their taxable income, but the remaining $5,000 of overtime would still be taxed normally. It is important to note that this only applies to 'legally required' overtime. If you are in a specialized role that is exempt from FLSA overtime rules, or if your employer gives you a voluntary 'bonus' that isn't classified as statutory overtime, you won't be able to claim the deduction. This creates a clear distinction between hourly workers and high-earning salaried professionals who may work extra hours but don't qualify for mandatory time-and-a-half.