No Federal Tax on Overtime Pay — the Complete 2025 Rules
Which pay qualifies, how to track the premium portion only, and exactly where it goes on your return.
The overtime deduction under OBBBA is now in full force, retroactive to January 1, 2025. Here's exactly what qualifies as "premium pay" and how to capture every dollar.
1. What counts as deductible overtime?
- Only the premium portion — the extra 50% or 100% above your regular rate
- Must be labeled as overtime on your pay stub or payroll report
Common examples:
2. Who qualifies?
- Any W-2 employee (hourly or salaried non-exempt)
- Police, firefighters, nurses, factory workers, construction, retail, and more
- No occupation list needed — if it's true overtime under FLSA rules, it counts
3. How it shows up on your 2025 return
The deduction goes on Schedule 1, Line 8z — "Qualified Overtime Premium – OBBBA." You do not attach proof, but keep:
- Pay stubs highlighting the overtime line
- Your year-to-date payroll summary from ADP, Gusto, Paychex, etc.
Create one new income account — "Nontaxable Overtime Premium – OBBBA" — and reclassify only the premium portion (not the base wages). At year-end, that account balance is the exact number that goes on Line 8z.
Need help setting it up? →One thing most people miss
Bonuses labeled "non-discretionary" — attendance, production, and the like — do not qualify. Only true FLSA overtime premium pay counts.
These newsletters provide general tax and bookkeeping education only and are not personalized advice. Consult your CPA about your specific situation.