Proposed Bill Would Make Overtime Pay Tax-Free Starting After Enactment

The Deal: Tax-Free Overtime Pay

The 'No Tax On Overtime Act of 2025' proposes a straightforward change: making certain overtime pay exempt from federal income tax. If enacted, any overtime compensation you receive after the bill becomes law wouldn't be counted as part of your gross income when it's time to calculate your taxes. The bill specifically targets overtime pay as defined under Section 7 of the Fair Labor Standards Act (FLSA) – that's typically the time-and-a-half rate non-exempt employees get for working more than 40 hours in a week.

Who Gets the Paycheck Boost?

So, what does this mean for your bottom line? If you're an hourly worker covered by the FLSA and you put in extra hours, this bill could mean more take-home pay from that overtime work. For example, if you earned $500 in overtime pay, under this proposal, that $500 wouldn't be subject to federal income tax like your regular wages.

However, the impact isn't the same for everyone. The actual dollar benefit depends heavily on how much overtime you work and your regular pay rate. Someone working extensive overtime at a higher wage would see a larger tax saving than someone working occasional overtime at a lower wage. It's also worth noting, as highlighted in Section 2, the benefit is tied strictly to FLSA-mandated overtime. Salaried employees exempt from overtime rules, or workers who don't typically exceed 40 hours a week, wouldn't see a direct change from this specific provision.

The Ripple Effect: Budgets and Fairness

While tax-free overtime sounds appealing for eligible workers, there's a flip side to consider. Exempting this income means less tax revenue flowing to the federal government. This potential reduction in revenue (an Economic Burden concern noted in analysis) could eventually lead to budget adjustments or shifts in other tax policies down the road to make up the shortfall.

There's also the question of fairness (Disproportionate Impact concern). Because the benefit scales with the amount of overtime worked and the wage rate, individuals in higher-paying roles that require significant overtime could gain considerably more from this tax break than lower-wage workers who may not have the same overtime opportunities. The bill is clear and has low vagueness, directly linking the tax exemption to the existing FLSA framework, which helps define exactly who qualifies.