Overtime pay feels like a well-earned reward for our hard work, whether it’s about late shifts, working over the weekends, or staying up late. But when the paycheck arrives, it seems smaller than expected. Why? Because there are tax deductions on the overtime paycheck we receive, which feels unfair. So here is some truth about the taxes applied to overtime pay.
Pay earned for hours worked beyond the standard 40 hours per week is called overtime pay. The idea that overtime pay is tax-free is a common misunderstanding. In reality, overtime pay is subject to the same federal income, Social Security, and Medicare taxes as normal salaries. To be more specific, it is 1.5 times the standard hourly rate for every hour above 40.
In 2025, several tax-related bills were introduced and moved through Congress. Early in the year, the House put forward the “Overtime Pay Tax Relief Act of 2025” (H.R.561), which aims to let workers deduct qualifying overtime earnings from their federal taxable income. The Senate followed in March with the “No Tax on Overtime Act” (S.1046), a proposal to exclude overtime pay from federal income taxes altogether. Then, in May, the House passed the “One Big Beautiful Bill Act” (H.R.1), a broad tax reform package that includes plans to eliminate federal taxes on overtime pay and tips from 2025 through 2028. The bill also recommends increasing both the child tax credit and the standard deduction. Although it has cleared the House, the legislation still needs approval from the Senate and the President before it can take effect.
Only employees who are nonexempt and work more than 40 hours in a week (as defined by federal law) would qualify for a new federal tax deduction on their overtime pay, if proposed legislation is passed.
This tax break would not be available to exempt or highly paid employees, and it would only apply to workers who:
Several proposed bills, such as the ( One, Big, Beautiful Bill,) the Overtime Pay Tax Relief Act of 2025, and the No Tax on Overtime Act of 2025, aim to help middle-income workers by letting them deduct their overtime wages from their federal taxable income. These changes would affect federal taxes only, unless states choose to make similar changes.
Even if these bills become law, employers would still be required to withhold and report payroll taxes (including on overtime) to the IRS and any state tax agencies. However, eligible employees would be able to claim the deduction when they file their federal tax returns.
Just like regular wages, overtime pay is subject to the following:
These taxes would be withheld by the employer, whether they include overtime or not.
Your overtime paycheck feels smaller because the higher the total income, the higher the tax withholding. Also, the payroll system calculates taxes on the total earnings, not on a per-hour basis, and more gross pay doesn't always mean more net pay, because of increased deductions and taxes.
Overtime is not taxed more than regular wages, though it feels that way. However, the new legislation might change how overtime is taxed soon, likely increasing the total income for the eligible workers.
Overtime taxes often feel unfair; however, if the proposed bill passes, we expect changes that could make overtime pay and tips completely tax-free at the federal level.
Until then, we should understand how overtime is taxed, which will help us manage our expectations and make better financial plans.
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