Changes to Overtime Revenue for American Workers

Thanks to President Donald Trump’s “big beautiful bill,” millions of Americans are finding ways to keep more of their earnings from overtime work.

The legislation includes provisions allowing for certain deductions on overtime income. Essentially, this means that workers can deduct the amount they earn from overtime from their taxable income, making those earnings exempt from federal income tax.

That said, it’s not all straightforward. There are various exceptions, restrictions, and regulations that can complicate things a bit.

So, how does it actually work?

Single individuals can deduct up to $12,500 each year for eligible overtime income, while married couples filing jointly can deduct as much as $25,000.

However, not every dollar counts; taxpayers can only deduct the portion of their overtime that exceeds their standard hourly wages. So, if an individual earns overtime pay at their usual hourly rate, they can only deduct an extra 50% of that amount.

There’s also a gradual phase-out: single filers earning more than $150,000 and joint filers making above $300,000 see their deduction reduced by $100 for every $1,000 they earn over those limits.

While workers aren’t obligated to pay federal income tax on qualifying overtime income, it’s worth noting that additional wages are still subject to federal payroll taxes, as well as state and local taxes.

The legislation defines “eligible overtime compensation” as any overtime pay that exceeds the standard fee, as per Section 7 of the Fair Labor Standards Act (FLSA) of 1938.

According to the FLSA, employees must be paid 1.5 times their usual rate for any hours worked beyond 40 in a week, although there are a few exceptions to this rule.

As per the Yale Budget Lab, around 97.7 million workers are covered by overtime protections under the Fair Labor Standards Act as of 2023. Remarkably, only 8% of hourly employees and 4% of salaried employees consistently receive these protections.

It’s important to note that this new deduction is only temporary and is set to expire after 2028 unless new legislation is passed to extend it.