Who Gets ‘No Tax on Overtime'? It's Messy.

Hindustan Times

5 days ago

WASHINGTON—President Trump's popular 'no tax on overtime' policy will help millions of workers save an estimated $90 billion through 2028, but the law is full of fine print and potential confusion over who is eligible for the new savings.
Under the law, the only overtime compensation that qualifies for the new deduction is the extra wages—the 'half' of 'time and a half' pay—required under the federal Fair Labor Standards Act, or FLSA.
That definition excludes overtime paid to airline employees, railroad workers and other transportation laborers covered by separate overtime laws. It doesn't include some payments under agreements outside FLSA or workers specifically exempted from FLSA. And it excludes payments required under state laws like California's, where overtime starts after eight hours daily instead of 40 hours weekly.
The upshot: The break will cut taxes by thousands of dollars for many overtime workers, but some might not necessarily get the tax break, and figuring out who qualifies could be tricky.
'There's a big gap between that assumption by many hopeful people and what actually we think is going to happen,' said Mary Hevener, an attorney at Morgan Lewis who advises employers. 'A lot of the overtime that people are receiving is not going to be subject to this tax benefit.'
Employers, tax lawyers and payroll professionals are wrapping their arms around the deduction, which Trump signed into law July 4 in the 'one big, beautiful bill.' Like new tax breaks for tipped workers and senior citizens, 'no tax on overtime' is retroactive to the beginning of 2025.
The overtime-pay deduction is capped at $12,500 for individuals and $25,000 for married couples. That could lower some households' tax bills by $6,000, and it is available whether or not taxpayers itemize deductions. The break starts shrinking once income reaches $150,000 for individuals and $300,000 for married couples. Because it is an income-tax deduction, workers still owe payroll taxes for Social Security and Medicare on overtime pay.
Lawmakers tied the tax break to the FLSA overtime definition because that was a known federal standard that could be implemented and because they wanted to limit revenue consequences, according to people familiar with the decision.
The Treasury Department expects to issue guidance to help workers and employers report and claim the deduction. For 2025, the government isn't planning to change Form W-2, which reports earnings to workers and the Internal Revenue Service. Instead, as employers update systems, workers will likely rely on separate payroll statements to claim the deduction on tax returns in early 2026.
The Treasury Department is considering providing relief from certain penalties during this first year. The government may also issue guidance about overtime definitions and adjusting paycheck withholding.
'Treasury began working with businesses and payroll providers three months ago—well before the bill's passage—to ensure that the president's no-tax-on-overtime commitment is implemented as seamlessly as possible for employers and delivers the full tax relief hardworking Americans were promised,' Deputy Treasury Secretary Michael Faulkender said in a statement.
Railroad workers are another group whose overtime pay won't qualify for the tax deduction.
Early frustrations
The deduction's limits are already frustrating airline and railroad workers, who often get overtime pay under union contracts and are exempt from FLSA because they are covered by the Railway Labor Act.
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.
'It's a legislative blunder and a political blunder,' said John Samuelsen, international president of the Transport Workers Union, who said he thought the language was unintentional. 'This will become a huge political issue, particularly for the Republicans, if it's not fixed.'
An earlier no-tax-on-overtime bill from Sen. Roger Marshall (R., Kan.) contained a more expansive definition. The American Association of Railroads is urging Congress to change the final language.
Chris Comeau, a TWU member in Massachusetts, works 20 to 30 hours of overtime most weeks cleaning commuter trains and was hoping the break could save him thousands of dollars. Comeau said he supported Trump and the no-tax-on-overtime idea but was disappointed that rail workers won't qualify.
'You don't get more middle class than guys that are fixing trains and riding on trains and cleaners,' he said.
Employers will ultimately track two different numbers: overtime they pay and overtime qualifying for the deduction, said Curtis Tatum, senior director of legal and compliance at PayrollOrg, an association of payroll professionals.
'It's going to be a big learning curve,' he said.
Employers responsible for implementing the deduction don't get direct benefits, said Steven Johnson of Morgan Lewis. They may have to explain to employees the differences between overtime amounts on pay stubs and tax forms.
Workers who do benefit and don't try to adjust paycheck withholding now will likely see the deduction increase tax refunds in early 2026.
Campaign promise now reality
Trump pitched 'no tax on overtime' during his campaign with other tax-cut promises. Republicans layered them atop extensions of expiring tax cuts.
Trump's new policies are more popular with voters than the law as a whole. In a recent Wall Street Journal poll, 72% of respondents favored the overtime deduction; support was higher among people making between $20,000 and $80,000.
At a recent House Ways and Means Committee hearing in Las Vegas, paint foreman Eric Byington praised the idea.
'When you want to hustle, work overtime, that money goes straight into your pocket,' he said. 'These tax breaks are immense for the regular working people.'
The benefit could spur disputes between employees and employers. The new advantage for employees covered by FLSA puts more pressure on distinctions between independent contractors and employees, and between workers who qualify for FLSA overtime and those who are exempt.
'There's massive, constant litigation over this issue, whether a person should be exempt or not,' said Thomas Cryan, an attorney at Saul Ewing. 'There's going to be lots of gray areas.'
Write to Richard Rubin at [e-mail]