They say the only two certainties in life are death and taxes. But the new “Big Beautiful Bill” claims to eliminate one of those—at least for overtime pay.
The budget bill, passed in July, fulfills a key Trump campaign promise to remove taxes on overtime. Even better, the law is retroactive to the start of 2025, giving workers six extra months of tax-free overtime pay on top of future savings.
But the reality isn’t as generous as it sounds.
Before planning how to spend that extra money, it’s important to know that the law comes with some big catches.
Not all overtime pay is tax-free
When promoting the law, the White House said it “makes good on … President Trump’s cornerstone campaign promises and benefits hardworking Americans where they need it the most — their paychecks.”
In some ways, that’s true. But the “Big Beautiful Bill” only removes some taxes on overtime pay.
The Wall Street Journal (WSJ) explained that the tax break only applies to part of overtime pay—the “‘half’ of ‘time and a half pay’ required under the federal Fair Labor Standards Act.”
For example, if a worker earns $40 an hour, their time-and-a-half overtime pay would be $60 an hour. Of that $60, only $20 (the “half” portion) is tax-free.
Also, “no tax on overtime” applies only to federal income tax. State and local taxes still apply (unless your state decides otherwise), and Social Security and Medicare taxes are still taken from all wages, including overtime.
There’s also a cap: $12,500 per person or $25,000 for couples filing together. Workers making over $150,000 (or $300,000 combined) aren’t eligible for tax-free overtime.
Forbes pointed out another issue: fairness. Two people making the same annual pay could be taxed differently. Hourly workers logging FLSA overtime can deduct part of it, while salaried workers working the same extra hours get nothing.
Some workers get overtime pay under different rules. The WSJ gave airline and railroad workers as examples. Their overtime often comes from union contracts and they’re exempt from FLSA because of the Railway Labor Act. These workers usually cannot claim the tax deduction.
This means similar jobs could be treated differently. An airline jet mechanic wouldn’t get the deduction, but an airplane mechanic at another company might.
The long-term effects
The law could also have bigger effects over time.
The Economic Policy Institute (EPI) warned that it might push people to work as much overtime as possible, including evenings and weekends, which could hurt their health, well-being, and productivity. Workers who cannot do extra hours for personal or health reasons would miss out. The EPI called the law “another gimmick that does more harm than good” and suggested giving raises instead of extra hours.
Forbes described the law as “a stealth anti-job creation measure” because it may reduce the need for employers to hire more workers. “A 50-hour week for one employee can be replaced by adding 10 hours across five workers. The overtime deduction may boost pay for some, but it also concentrates work hours in fewer people.”
According to the Tax Policy Center estimates, only 9% of U.S. households will save money from the law, with an average gain of about $1,400 per year. Most workers will see the benefit at tax time.
Finally, the “no tax on overtime” rule expires in 2028.
