Overtime pay receives tax break in megabill

President Donald Trump's major tax and spending law includes a four-year provision to shield overtime pay from taxation.

During the 2024 campaign, Trump said he would "end all taxes on overtime." The new law is a step in that direction, but it has limits.

The law covers people who work overtime under the Fair Labor Standards Act, which requires time-and-a-half pay for hours worked over 40 in a week. Many workers — including supervisory and professional workers, the self-employed and independent contractors — do not qualify for overtime and thus would not benefit from the provision.

About 8% of hourly workers and 4% of salaried workers regularly work overtime under the Fair Labor Standards Act, and another 4% of hourly workers and 1% of salaried workers do occasional overtime work, according to the Yale Budget Lab.

The new law allows these workers to deduct up to $12,500 in overtime compensation (for single filers) or $25,000 (for joint filers). 

The deduction phases out for income levels between $150,000 and $275,000 (for single filers) and $300,000 and $550,000 (for joint filers).

Like some other breaks in the law, the deduction expires in 2028.

The provision does not apply to overtime that is not required under the Fair Labor Standards Act, such as overtime paid under more stringent state laws, Jennifer Karpchuk, co-chair of the state and local tax team at the law firm Holland & Knight, told PolitiFact.

Workers may think the law makes all compensation for overtime work tax-free. Instead, it makes tax-free the incremental increase in pay from working overtime — the "and a half" portion, not the "time" portion.

The law refers to "qualified overtime compensation," which means the pay in excess of the regular rate, said Garrett Watson, director of policy analysis at the Tax Foundation.

This means the law Trump signed will benefit many workers who receive overtime pay, but it won't eliminate taxation on all the money they receive from working overtime. 

We rate this promise a Compromise.