Did Trump Sign No Tax on Overtime? What it Means in 2025

President Donald J. Trump just delivered one of the most pro-worker, pro-business tax changes in recent memory. On July 4, 2025, the One Big Beautiful Bill Act was officially signed into law, introducing a wide range of tax breaks aimed at boosting take-home pay, strengthening the labor market, and driving economic growth. Among the biggest headlines? No federal income tax on overtime hours through 2028.

Now, let’s clear something up right away: this isn’t a full exemption from all taxes on overtime. It’s a federal income tax deduction for qualified overtime compensation, and it’s already sparking major conversations across both boardrooms and breakrooms. For business owners, this change affects more than just your employees’ tax returns—it also impacts payroll reporting, compliance requirements, and potentially even hiring and retention.

Here’s what you need to know.

The “No Tax on Overtime Pay” Provision Explained

Section 70202 of the One Big Beautiful Bill Act introduces a new federal tax deduction for individuals earning qualified overtime compensation under Section 7 of the Fair Labor Standards Act (FLSA). That means the 1.5x pay rate for hours worked over 40 in a week now qualifies for special tax treatment—but only the premium portion of those wages.

Starting January 1, 2025, individuals can deduct:

• Up to $12,500 in overtime pay (single filers)
• Up to $25,000 in overtime pay (joint filers)

This is in addition to the standard deduction and applies to income tax only. Social Security and Medicare taxes still apply. The deduction phases out at $150,000 MAGI for individuals and $300,000 for joint filers and is currently scheduled to sunset after December 31, 2028.

What Business Owners Need to Know

This new deduction directly impacts how business owners handle reporting, payroll, and planning. While it’s designed to benefit employees, employers play a central role in ensuring accurate tracking and compliance, and in many cases, how well you prepare could affect your team’s ability to claim the deduction. Let’s walk through the most important areas to focus on.

1. W-2 and 1099 Reporting Requirements

Under the new law, business owners are responsible for accurately reporting the total amount of qualified overtime compensation paid to each employee. This must be included on Form W-2 for employees and on Form 1099 for nonemployees such as independent contractors. While the IRS is expected to release updated forms and guidance soon, the burden of compliance starts now.

If your payroll software or accounting system doesn’t currently separate standard pay from qualified overtime, now is the time to make adjustments. Proactively organizing this data will save time, reduce risk, and help you remain compliant when year-end reporting rolls around.

2. FLSA Compliance Matters

This deduction is narrowly tailored to align with federal law, specifically, Section 7 of the Fair Labor Standards Act (FLSA). That means it only applies to federally mandated overtime (typically time-and-a-half for hours worked beyond 40 in a week). Overtime premiums required under state laws, local ordinances, or collective bargaining agreements do not qualify.

If you operate in a state with stricter overtime rules or work with unionized labor, you’ll need to clearly distinguish which portion of pay is FLSA-compliant versus state- or contract-driven. Misclassifying employees or failing to track properly could result in disallowed deductions and potential audits.

In short, this is the year to double-check that your job classifications, pay structures, and overtime policies are fully aligned with FLSA requirements.

3. Employers May Approximate Amounts

Recognizing that employers may not be set up to instantly calculate exact figures, the law offers some initial flexibility. For tax year 2025, you’re permitted to approximate qualified overtime compensation using any “reasonable method” the Secretary of the Treasury will outline.

While the official guidance is still pending, this likely means using documented work hours and pay rates to create a good-faith estimate. The keyword here is reasonable—you’ll want to document your method and keep clean records to defend your approach if needed. This is a prime example of where a qualified tax strategist can help you stay on offense, not just defense.

4. No Impact on Employer Payroll Tax Obligations (Social Security and Medicare)

This new deduction doesn’t change your responsibility to pay Social Security and Medicare taxes (FICA) on total employee wages, including any overtime pay. Your payroll tax burden remains the same. However, it does give your employees a meaningful boost to their take-home pay by reducing their federal income tax liability. That’s an indirect win for you as an employer—when workers feel they’re getting more out of overtime, they’re more likely to say yes to those extra shifts.

It also gives you more leverage to stay competitive in today’s tight labor market without immediately increasing base pay. Even though it doesn’t lower your tax bill, it may reduce turnover and improve productivity—two outcomes that pay off in the long run.

How This Changes the Compensation Conversation

For business owners, this tax deduction could become a strategic tool, not just a compliance requirement. It’s an opportunity to reshape how you think about compensation, productivity, and team loyalty. In a labor market where every hiring edge matters, the overtime tax deduction could be a powerful tool for both recruiting and retaining great employees.

Recruiting and Retention

If your business relies on hourly labor—whether in hospitality, construction, logistics, retail, healthcare, or manufacturing—you know how tough it can be to compete for dependable workers. The promise of tax-free overtime pay through 2028 gives you a new advantage in that conversation. It adds a meaningful incentive for employees to pick up extra shifts, stay loyal to your company, and work overtime when you need them most.

Workers are more likely to commit to a job when they see their effort directly tied to better financial outcomes. By offering consistent overtime opportunities and educating your team about this new tax benefit, you create a compensation environment where hard work actually pays off—literally.

Boosting Take-Home Pay Without Raising Base Pay

Let’s face it: raising base wages increases your permanent labor costs. Offering more qualified overtime opportunities, on the other hand, gives employees a way to earn more while giving you control over when and how those costs occur. Thanks to this federal income tax deduction, that extra overtime pay will go further for your team, without requiring you to spend more on benefits, payroll taxes, or annual raises.

This deduction gives employees the psychological and financial win of a bigger paycheck, while allowing you to stay flexible with your staffing strategy and your budget. It’s one of the few compensation tweaks that benefits both sides of the equation.

Simplifying Year-End Tax Strategy Conversations

Come tax season, your employees will have questions—and if you’re prepared to answer them, you strengthen your role as a trusted employer. Whether you manage payroll in-house or through a third-party provider, now’s the time to build systems for tracking qualified overtime pay.

Make sure your HR and finance teams understand how the new law works, and be ready to communicate clearly with staff.

The White House calculator makes it easy to show real numbers—how much workers in your state are likely to save in federal income taxes on both tips and overtime. Even a few hundred dollars in extra take-home pay can make a big impact on families living paycheck to paycheck. When you help your employees connect the dots between working overtime and keeping more of their money, you build trust, loyalty, and morale.

Broader Implications and Considerations

Even if you don’t manage a workforce that regularly logs overtime, this law reflects something much bigger: a return to pro-growth, pro-worker tax policy. The Big Beautiful Bill Act wasn’t just about overtime. It also eliminated federal income tax on tips, doubled the child tax credit, expanded Made in America deductions, and sent a clear message—this administration is rewarding work and reducing tax burdens across the board.

For business owners, that means opportunity. Opportunity to grow, reinvest, and build compensation structures that attract top talent without overextending your bottom line. In a climate where labor costs, compliance, and tax complexity can feel overwhelming, this new deduction is a reminder that good policy can work for everyone.

Trump’s Overtime Deduction Is a Smart Tax Move—Here’s How to Leverage It

So, did Trump sign no tax on overtime? Yes! The provision is a valuable tax benefit that business owners should understand and plan for. While it requires some adjustments to how you track and report wages, it also gives you a powerful new tool for recruitment, retention, and employee satisfaction.

At OTB Tax, we specialize in helping business owners leverage every available deduction and minimize income taxes legally, morally, and ethically. If you’re unsure how this new law affects your payroll, your compliance responsibilities, or your own federal tax return, now is the time to talk strategy.

Let us help you take full advantage of what this bill makes possible—because with smart planning, working overtime doesn’t just benefit your employees, it can benefit your business too.