Overtime

[Bpasten90]

What is the overtime pay deduction and how will it affect me

[FranklinF]

Per the Internal Revenue Service:

Effective for 2025 through 2028, individuals who receive qualified overtime compensation may deduct the pay that exceeds their regular rate of pay – such as the “half” portion of “time-and-a-half” compensation -- that is required by the Fair Labor Standards Act (FLSA) and that is reported on a Form W-2, Form 1099, or other specified statement furnished to the individual.

• Maximum annual deduction is $12,500 ($25,000 for joint filers).
• Deduction phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers).

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[FranklinF]

Example

• An employee's regular hourly rate is $30.
• When working overtime, their rate is time-and-a-half, or $45 per hour ($30 x 1.5).
• The "no tax on overtime" deduction applies to the overtime premium, which is the "half" or the portion exceeding their regular pay, according to www.jems.com. In this case, that's $15 per hour ($45 - $30).
• If the employee works 10 hours of overtime in a week, the eligible overtime premium for the deduction would be $150 ($15 per hour x 10 hours).
• This means, that for the purposes of federal income tax, the employee can deduct that $150 from their taxable income when they file their annual tax return. 

Important points

• This is a deduction, not an exemption. Taxes will still be withheld from overtime paychecks, but the deduction can be claimed when filing annual tax returns.
• The deduction is temporary. It's currently in effect for tax years 2025 through 2028.
• There are income limits. The deduction phases out for those earning over $150,000 in modified adjusted gross income ($300,000 for joint filers).
• The deduction is capped. The maximum deduction is $12,500 for single filers and $25,000 for those married filing jointly.
• Only federal income tax is affected. This deduction does not apply to payroll taxes (Social Security and Medicare), or state and local income taxes.
• It applies only to FLSA-required overtime. Overtime premiums required by state laws or union contracts may not be eligible for this deduction. 

This means the "no tax on overtime" provision doesn't eliminate all taxes on overtime pay. It provides a deduction that can reduce the federal income tax burden for qualifying individuals, making overtime work potentially more financially beneficial. 

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