They say that the only two certainties in life are death and taxes. The recently passed “Big Beautiful Bill,” however, claims to eliminate one of those — at least for overtime hours.
The budget bill, passed in July, followed up on a key Trump campaign promise to eliminate taxes on overtime pay. Even better: the law is retroactive to the beginning of 2025, giving those who work overtime an additional six months of tax-free wages ahead of all the money the bill will save them going forward.
But the reality may be far less generous than it sounds.
Before you start planning how to spend all that extra cash, be aware that the new law contains several big, not-so-beautiful catches.
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In touting the elimination of taxes on overtime pay in the budget bill, the White House claimed that the law “makes good on … President Trump’s cornerstone campaign promises and benefits hardworking Americans where they need it the most — their paychecks.”
And in some ways, it does. The reality, however, is that the “Big Beautiful Bill” only eliminates some tax on overtime pay.
To start, the Wall Street Journal (WSJ) noted that the tax break only pertains to a portion of overtime pay, or the “‘half’ of ‘time and a half pay’, required under the federal Fair Labor Standards Act.”
For example, if a worker makes $40 an hour, then their time and a half overtime would amount to $60 an hour. Of that $60, only $20 (the “half” part of “time and a half”) remains tax-free.
Additionally, “no tax on overtime” is a federal income-tax change only. State and local income taxes still apply (unless your state separately conforms), and Social Security and Medicare taxes are still withheld on all wages, including overtime.
As well, there’s a cap to how much overtime pay remains tax-exempt: $12,500 per person annually, or $25,000 for people filing together. Earners who make more than $150,000 (or $300,000 combined between two people filing together) are not eligible for tax-free overtime pay.
Another issue, raised by Forbes, is horizontal equity: two people with the same annual pay can end up taxed differently. An hourly worker who logs FLSA overtime can deduct part of that overtime, while a salaried worker putting in the same extra hours gets no break.
Then there are those workers whose overtime pay is dictated by different agreements or laws. The WSJ pointed to airline and railroad workers as examples of those “who often get overtime pay under union contracts and are exempt from FLSA because they are covered by the Railway Labor Act.” These workers generally will not qualify for the deduction on their contract overtime.
They added that “One result is different treatment for similar jobs. An airline jet mechanic wouldn’t get the deduction but an airplane mechanic at a separate maintenance company could.”
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Beyond the immediate monetary effect, a more broad catch to the new law could make itself known in the long run.
The Economic Policy Institute (EPI) raised concerns that the law will incentivize many to work as much overtime as possible to gain the extra income, including evenings and weekends — habits “associated with a range of negative impacts on physical and mental health, well-being, and productivity.”
In addition, those unable to work overtime for personal or health reasons will lose out on the benefits. The EPI called the law “another gimmick that does more harm than good” and suggested that offering workers raises so they don’t have to work the extra hours would prove a better option.
Forbes, meanwhile, labeled the law “a stealth anti-job creation measure” because it lessens the need for employers to hire more workers.
“A 50-hour week for one employee can be replaced by tacking on an additional 10 hours across five separate workers. The overtime deduction thus may boost take-home pay for some, but it does so by encouraging a labor distribution that concentrates hours in the hands of fewer people.”
That said, according to Tax Policy Center estimates, only 9% of American households will actually save money by paying fewer taxes on overtime pay, resulting in an average added windfall of roughly $1400 annually. Most workers will see the benefit at tax time.
And, of course, there’s one final caveat to the “no tax on overtime pay” law: it expires in 2028.
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