The 2025 Trump tax bill created a new tax deduction for the premium portion of overtime pay earned under the Fair Labor Standards Act. The FLSA requires employers to pay eligible workers 1.5 times their usual wage rate for hours worked in excess of 40 in a week. For instance, if an FLSA-covered worker who normally earns $20 an hour works 48 hours in a single week, their employer must pay them 1.5 times their regular rate of pay (1.5 x $20 = $30 an hour) for the 8 hours worked beyond 40. However, of the pay earned for those overtime hours, only the 50% premium portion would be tax deductible (i.e., $10 an hour times 8 hours, or $80 for the week). Workers receiving overtime pay due to requirements outside of the FLSA, such as overtime provisions in union contracts or state overtime rules, may not deduct those overtime earnings.1 Eligible workers can deduct up to $12,500 of qualified overtime compensation ($25,000 if married filing jointly) from their taxable income for tax years 2025 through 2028. Deductions begin to phase out at $150,000 in adjusted gross income for single filers or $300,000 for married filers. Workers must still pay federal payroll taxes on all their overtime and may owe state income taxes on overtime as well.

Notes

1. Some states require employers to pay overtime under other circumstances. For instance, California requires overtime be paid any time a nonexempt worker exceeds 8 work hours in a day. In Rhode Island, certain retail workers must be paid overtime for hours worked on a Sunday. Overtime pay earned due to these state provisions would not be eligible for the federal deduction.

The tax deduction on overtime compensation directly benefits primarily middle- and upper-middle-income workers who work overtime as defined in the federal Fair Labor Standards Act. Employers who require employees to work long hours will also benefit. See the question on employer behavior for more.

Among individual taxpayers, anyone who receives FLSA-qualified overtime and whose total income is below the eligibility cap is eligible for the tax benefit. However, they must have some income tax liability, and the size of the benefit is directly proportional to their overtime earnings as well as their overall income level. In 2024, approximately 6% of workers reported regularly working FLSA-qualified overtime. Workers who receive the most overtime compensation, particularly those with higher incomes still below the eligibility cap, will receive the largest tax benefit. Most low-income workers will receive little, if any, benefit.

Among the approximately 9% of households that will benefit from the overtime deduction, the average tax change will be about $1,400 in 2026. However, among all tax filers (including the vast majority who do not have overtime earnings), the average benefit is small: The Tax Policy Center estimates only $130 for all tax units, with an average benefit of $440 for tax units in the top 20% of income, and between $0 and $20 for households in the bottom 40%. Roughly 85% of all the benefits of the policy will go to the top 40% of taxpayers, while the bottom 40% will see virtually no benefit.

Workers who do not receive overtime compensation—over 90% of U.S. workers—do not benefit from the policy. Many workers are not eligible for overtime pay even when they work more than 40 hours in a week—either because they work in an occupation that has been intentionally excluded from overtime eligibility or because their job has been classified (often incorrectly) by their employer as overtime exempt. Today, over 70% of salaried workers are exempt from overtime under the FLSA. (Notably, many of these workers would be eligible had the Trump administration not undermined a U.S. DOL rule that would have expanded overtime eligibility to 4.3 million salaried workers.) Also, many eligible workers are unable to work overtime even if they want to, due to care responsibilities, health needs, or other constraints. Taxpayers who are married filing separately and taxpayers who do not have a Social Security number also cannot claim the deduction.

Only the overtime pay earned under the FLSA is eligible for this income tax deduction. For example, some union members may have benefits in their collective bargaining agreements that are more protective than the federal standard. These workers’ overtime premium pay may kick in at a daily rate if they work more than 8 hours a day, or at 35 hours a week rather than 40. Some states also have daily overtime laws, rather than weekly, and others have overtime requirements for workers in certain occupations. All these workers would only be able to deduct the overtime premium earned at the federal standard of 40 hours a week from their income tax; other forms of overtime premium pay are not eligible.

Exempting overtime pay from taxes will encourage workers to work longer hours. For those already working or desiring to work long hours, the policy may provide them with additional after-tax income, though not necessarily. (See the section on employer behavior for more detail.) Some workers less inclined to work overtime may feel increased pressure to do so, either self-imposed or from their employer. Ideally, workers would have enough bargaining power at their job to negotiate the workweek length that makes sense for them; unfortunately, many workers may not be in this position. Ultimately, the policy may raise after-tax incomes for these workers, but not without tradeoffs: Working excessive hours is associated with a range of negative impacts on physical and mental health, as well as on productivity.

The overtime tax deduction will also reduce pressure on employers to raise workers’ base wages and, more broadly, could hamper advocacy efforts at the state and federal level to reform the overtime system, shorten the workweek, and increase workers’ wages.

Overtime exists to disincentivize employers from overworking their employees. If an employer asks workers to put in more than 40 hours a week, they must pay a premium for those excess hours. The overtime system—and consequently, the 40-hour workweek—was established by the Fair Labor Standards Act of 1938, a law that was the result of fierce struggle, organizing, and advocacy by workers who frequently labored 60–80 hours a week in difficult and dangerous jobs. The overtime provisions of the FLSA were also intended to bolster hiring, by creating an incentive for employers to bring on new staff rather than overwork their existing employees.

The overtime deduction undermines the primary goals of establishing overtime—i.e., preventing excessive work hours and encouraging hiring—in several ways:

1. The policy will make it easier for employers to expect longer work hours from staff. Because of the preferential tax treatment for overtime pay, some workers who may have previously been reluctant to work beyond the 40-hour workweek may now be more willing to do so. And employers may feel more empowered to expect overtime as a normal course of operating (assuming they are willing to pay the premium.)
2. The policy will reduce pressure on employers to increase base pay, especially for overtime-eligible staff. For workers already working overtime, employers may point to the new tax benefit as absolving them of any need to grant those workers a raise. Similarly, an employer could offer eligible staff not previously working overtime new access to “tax-free” overtime hours in lieu of a pay raise.
3. Some employers may be able to exploit the policy to reduce their overall labor costs, while simultaneously cementing expectations for long hours among salaried employees. An employer could reclassify previously ineligible salaried positions as hourly (with overtime) to mollify staff frustrated with their long hours. For instance, a worker paid a $50,000 annual salary and regularly being asked to work 60 hours a week could be converted to an hourly status at about $13.75 per hour. So long as they continued to work that 60-hour workweek year-round, they’d get about the same gross earnings, but with $7,150 in earnings now tax-free and thus, higher net income—while costing the employer nothing in additional compensation. Of course, if that employee works fewer hours on some weeks, they could end up worse off. Employers could also make this same conversion at lower corresponding hourly rates, providing affected employees a smaller—or even zero—net change in their after-tax income, while reducing their labor costs.
4. The overtime deduction may reduce employers’ incentive to hire more staff when additional labor hours are needed. If working longer hours is normalized—either because of employer pressure or employees seeking the tax benefit—and employers are facing less pressure to raise existing workers’ pay, they may simply increase existing staff hours rather than bring on additional staff.

Fundamentally, giving preferential tax treatment to overtime earnings reduces pressure on employers to raise wages. For someone not currently working overtime, but otherwise eligible under the FLSA, their employer could offer overtime hours as a substitute for pay raises. Employers could also reclassify previously overtime-ineligible salaried positions as hourly to make them overtime eligible and then set those workers’ wages and hours such that the employee’s after-tax earnings are comparable with their previous salaried levels, but now at a lower cost to the employer. See the section on employer behavior for more detail.

“No tax on overtime” also shrinks state revenues, leading to fewer funds available to pay for public goods and services that benefit the community.

Giving overtime compensation preferential treatment in the tax code makes our tax system less fair. Workers with similar pre-tax income should be treated similarly in the tax code—this is often referred to as “horizontal equity.” But “no tax on overtime” allows workers who receive overtime compensation to pay less in income taxes than workers with the same level of income who do not work overtime—even if many of these workers put in equivalent long hours. Salaried workers excluded from overtime eligibility and workers unable to work overtime hours because of care responsibilities or health constraints should not be disadvantaged in the tax code.

The Trump tax bill’s overtime premium tax deduction will reduce federal government revenue by $23 billion in 2026, and $90 billion in the next 10 years. Whether the policy will affect state revenues depends on whether states “conform” to the federal tax code when defining taxable income and, in some cases, whether states decide to intentionally adopt analogous tax provisions in their state tax code. When Alabama previously exempted overtime from state taxes, the policy cost the state hundreds of millions of dollars, much of it slated for public schools, so the state decided to end the exemption. In Michigan, which has opted to enact the federal tax changes into state law, the income tax deduction for overtime is expected to cost the state $207 million in its first year of implementation. The Institute on Taxation and Economic Policy estimates that if all states with income taxes decided to adopt the overtime premium deduction, it would lead to a loss of $5.87 billion in state revenue in 2026 alone.

Income tax deductions only benefit workers who earn qualified income, and because the federal income tax system is progressive (people with larger incomes are taxed at higher rates), the benefits of income tax deductions skew toward higher earners. Households earning the most income receive the biggest benefits, and the lowest-earning households do not benefit at all. As a result, tax deductions are generally not well-targeted methods for raising the incomes of low- and middle-income workers, narrowing racial and gender income gaps, or addressing poverty and inequality.

Income tax deductions are also often temporary—the overtime premium deduction expires after 2028—so they do not provide durable benefits to workers. Moreover, some income tax deductions, including the deduction for overtime, exclude people based on their tax filing status. For example, taxpayers who are married filing separately and taxpayers who do not have a Social Security number cannot claim the deduction.

There are far more effective methods for increasing take-home pay for workers who work long hours that would not encourage excessive work, undermine government revenues, or make the tax code less fair. For instance, policymakers could increase the overtime premium rate from 1.5 to 1.75 or even 2 times base wages. They could raise the salary threshold under which salaried workers are automatically eligible for overtime when they work more than 40 hours in a week. They could have overtime kick in earlier, at 35 or 32 hours of work in a week. Lawmakers could also end occupational and industry-specific exemptions from overtime and bolster labor enforcement to stop employers from misclassifying workers as overtime-exempt.

Beyond strengthening overtime policies, there are several other effective and more equitable policies to support working families—including expanding the Earned Income Tax Credit and Child Tax Credit, providing workers with paid sick leave and paid family and medical leave, and supporting workers’ rights to form and join unions.

The harm caused by the Trump tax bill will greatly exceed any benefits for most working people. The bill included a set of small, temporary tax deductions for some workers who earn tips and overtime and created new, poorly-targeted child savings accounts—while the rest of the legislation hands huge tax giveaways to the rich at the expense of the working class. Trump’s tax bill will give a $1 trillion tax cut to the richest 1% over the next decade; it pays for these cuts by slashing an equivalent amount of funding for Medicaid and SNAP (food stamps). The bill also massively expanded funding for the Department of Homeland Security and Immigration and Customs Enforcement, providing them the resources to implement the administration’s mass deportation agenda—an agenda that will destroy jobs for both immigrant and native-born workers. In contrast, the bill added no new funding to federal agencies that enforce workers’ rights.