NEWS
A new federal rule taking effect in 2025 will allow millions of non-exempt employees to deduct the overtime premium from taxable income, lowering annual tax bills for workers who perform overtime work. Savings will depend on hours worked, regular rate of pay, income level, and how employers report overtime under federal law.
The deduction applies to the overtime premium—the extra compensation paid above the regular hourly wage when overtime hours exceed the weekly standard work period. Under the Fair Labor Standards Act, most non-exempt employees receive time and one-half of the regular rate of pay for work in excess of 40 hours per week. This structure is central to overtime pay calculation and determines which amounts may qualify for the deduction.
For 2025 through 2028, eligible workers may deduct up to $12,500 in overtime premiums if filing as a single taxpayer, or $25,000 if filing jointly. The IRS notes that qualified amounts must appear on Form W-2 or similar pay period records. The deduction may be claimed regardless of whether a taxpayer uses the standard deduction or itemizes their deductions.
Workers with an annual salary up to $150,000 may take the full deduction. For married couples filing jointly, the limit rises to $300,000. Above these thresholds, the deduction phases out. Employers must continue following wage and hour regulations when reporting overtime work, premium rates, and regular hourly wage details during each pay period.
A worker earning a regular rate of pay of $25 per hour who completes 200 overtime hours in a year would receive a $12.50 overtime premium per hour. This produces $2,500 in deductible income. At a 22 percent tax rate, the worker would save $550.
Employees earning under $50,000 may save up to $1,500 if they reach the maximum deduction and fall within the 12 percent tax bracket. Those earning between $50,000 and $100,000 in the 22 percent bracket could save up to $2,750. Workers with income between $100,000 and $150,000, often in the 24 percent bracket, may save roughly $3,000 before the deduction phases out.
Some employees working under fixed salary agreements may still qualify if they are not classified as exempt employees. Public-sector employers using compensatory time must follow the Wage and Hour Division rules to determine whether compensatory time affects deductible amounts. Workers who receive shift differential pay or night differential pay may experience variations in their savings, depending on how the premium pay is documented and accounted for.
The deduction will not change take-home pay during the year. Wage and hour laws require typical withholding on overtime pay, and the tax benefit appears only when filing the federal return. Workers with varying work periods or multiple sources of overtime pay should review documentation to ensure accuracy.
Employers must separately report overtime premiums on 2025 Form W-2 statements to help streamline IRS processing. Workers should verify that hours worked, premium rates, and overtime pay calculation details match both pay stubs and year-end reporting.
Employees who regularly perform overtime work should track their overtime hours annually and review each pay period record for accuracy. Those nearing the $12,500 maximum may find that additional overtime later in the year has limited tax benefit. Workers nearing the income phase-out threshold should closely monitor their annual salary to avoid losing the deduction.
Industries with heavy reliance on overtime—such as healthcare, logistics, retail, and manufacturing—may see increased interest in extra hours as the deduction becomes widely understood. Some employers may adjust workforce planning to balance staffing needs with the financial incentives tied to overtime premiums.
Union contract terms and collective bargaining agreements may influence how premium pay is classified. While the deduction may affect worker decisions, existing labor laws and wage and hour regulations continue to govern disputes, reporting requirements, and pay status rules.
By William Mc Lee, Editor-in-Chief & Tax Expert—Get Tax Relief Now
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