The 2025 tax law created a new deduction for overtime pay, and the headlines made it sound like overtime stopped being taxed. It did not. Understanding the difference matters, because workers who hear "no tax on overtime" and stop withholding correctly are in for an ugly April.
What the law actually says
- It is a deduction, not an exclusion. Overtime pay is still subject to withholding, Social Security and Medicare on every paycheck during the year.
- Only the overtime premium qualifies — the "half" of time-and-a-half, not the whole overtime check.
- The deduction caps at $12,500 per return for single filers ($25,000 married filing jointly) and phases out at higher incomes.
- It is in effect for tax years 2025 through 2028.
Why your paycheck barely notices
Payroll systems withhold on overtime exactly as before, because the break is delivered as an above-the-line deduction when you file your return — it reduces your taxable income in April, not your withholding in March. If you work significant overtime, you can choose to reflect the expected deduction on your W-4 (Step 4(b)) to bring some of it forward into your checks — but estimate conservatively, because the premium-only rule and the cap trip people up.
The planning takeaway
Track your overtime premium separately all year — the portion above your regular rate. At filing time that number, capped by the limits, is what the deduction is built on. And if you want to see how a deduction like this changes your withholding, add it in the calculator's deductions field and compare the reports side by side.