Overtime Deduction 2025 – What workers need to know

2025 “No Tax on Overtime” Deduction: What Workers Need to Know

Starting in 2025, many workers can deduct a portion of their overtime pay on their federal tax return under the One, Big, Beautiful Bill Act. Here’s a quick guide to who qualifies, how much you can deduct, and how to claim it.

What counts as “qualified overtime compensation”?

  • The deduction applies to the overtime “premium” — the part of time‑and‑a‑half that exceeds your regular rate — that is required by the Fair Labor Standards Act (FLSA) and reported to the IRS (for example, on a Form W‑2 or certain 1099s). Overtime still remains subject to income tax withholding and payroll taxes; the new rule lets you deduct the qualified portion when you file your return for 2025 through 2028.

How much can you deduct?

  • Up to $12,500 per year (or $25,000 if married filing jointly).
  • The deduction phases out once modified adjusted gross income (MAGI) exceeds $150,000 ($300,000 for joint filers)

Who’s eligible?

  • Employees and other workers who receive “qualified overtime compensation” required under the FLSA and reported to the IRS. You can claim the deduction whether you itemize or take the standard deduction.

Should you update your 2025 withholding now?

  • Yes, if you want a more accurate paycheck withholding for 2025. Because the IRS won’t change withholding tables or core information returns for 2025, you can reflect this new deduction by submitting a new 2025 Form W‑4 and entering your estimated deduction in Step 4(b) (the IRS provides a special W‑4 deductions worksheet for the new OBBBBA deductions)

Practical tips

  • Keep paystubs and year‑end forms (W‑2/1099) that show your overtime. You’ll use them to determine the qualified “premium” portion needed for Schedule 1‑A (Form 1040)
  • If your income may surpass the MAGI threshold, monitor the phase‑out so you don’t over‑adjust your withholding
  • Employers don’t need to change W‑2 formats for 2025, and withholding tables remain unchanged; workers can still benefit by updating their W‑4 and claiming the deduction at tax time.  KEEP THAT LAST PAYSTUB with year-to-date numbers.

Bottom line

If you worked overtime in 2025, you may be able to deduct the FLSA‑required “and‑a‑half” premium up to $12,500 ($25,000 joint), subject to income limits. Claim it on Schedule 1‑A and consider updating your Form W‑4 now so your 2025 withholding reflects the new deduction.