The brand new 2025 Trump tax regulation contains provisions for “No Tax on Suggestions” and “No Tax on Extra time.” I coated “No Tax on Suggestions” in a special submit. Let’s look into “No Tax on Extra time” now. If you happen to earn each suggestions and extra time pay, you’ll be able to profit from each!
Non-Exempt W-2 Workers
Typically, solely W-2 staff are entitled to extra time pay. Impartial contractors paid by a 1099 don’t qualify for extra time. Nor do self-employed enterprise house owners.
Amongst W-2 staff, for probably the most half, solely hourly (“non-exempt”) staff are entitled to extra time pay. Most salaried (“exempt”) staff don’t obtain extra time pay, whatever the variety of hours they work in every week.
Some salaried staff aren’t paid excessive sufficient to qualify as exempt staff. They’re nonetheless labeled as non-exempt and are entitled to extra time pay.
Exempt and non-exempt seek advice from the necessities mandated by the Truthful Labor Requirements Act of 1938. Being exempt implies that the employer isn’t required to observe these necessities in its employment relationship with you. Your employer will let you know whether or not you’re exempt or non-exempt in the event you’re undecided.
It’s unlikely that an employer is keen to re-classify a at the moment salaried worker from exempt to non-exempt to provide the benefit of “No Tax on Extra time.” Having you as a non-exempt worker would topic the employer to many necessities from the Truthful Labor Requirements Act. An employer desires to search out each motive to make an worker exempt from these necessities.
It nonetheless doesn’t depend in the event you’re an exempt worker and your employer voluntarily pays you further for further work. The brand new tax regulation limits “No Tax on Extra time” to extra time compensation “required below part 7 of the Truthful Labor Requirements Act of 1938.” Voluntary further pay doesn’t depend as a result of exempt staff aren’t required to be paid for extra time.
Not What You Suppose
The Truthful Labor Requirements Act requires that extra time have to be paid not less than 1-1/2 occasions the common hourly wage (“time-and-a-half”). Some state legal guidelines and union contracts require double time in some situations. Some employers voluntarily pay double time for holidays.
Suppose your common hourly fee is $30/hour and also you’re paid $45/hour for extra time. You obtain $450 in gross extra time pay while you work 10 extra time hours in every week. You’ll assume that “No Tax on Extra time” means you don’t pay tax on that $450, however that’s not the way it works.
“No Tax on Extra time” covers solely the pay premium over and above your common hourly fee. The “No Tax” half applies to $150 out of the $450 gross extra time pay for these 10 hours. You continue to pay taxes as traditional on $300 earned at your common $30/hour fee for the extra time hours.
Because of this, in case your extra time hours are paid time-and-a-half, you’ll haven’t any tax on just one/3 of your gross extra time pay. If you happen to’re paid double time, you’ll haven’t any tax on 1/2 of the gross extra time pay.
Non permanent Window
As is the case with a number of different provisions within the 2025 Trump tax regulation affecting particular person taxpayers, “No Tax on Extra time” is barely efficient between 2025 and 2028 (inclusive). It expires on the finish of 2028.
Tax Withholding
“No Tax” refers solely to the federal earnings tax. It doesn’t change the Social Safety and Medicare taxes withheld out of your paychecks. It doesn’t scale back your state taxes.
The IRS will make adjustments to payroll tax withholding to deal with extra time pay otherwise, however the adjustments received’t begin till 2026. You received’t see any change in your paychecks in 2025 except you alter your tax withholding along with your employer.
Tax Deduction
The IRS will add a spot on the W-2 kind for employers to interrupt out the extra time pay premium. Till then, your employer can report back to you exterior the W-2. You’ll have a brand new tax deduction in your extra time pay premium while you file your tax return. You’ll get the next tax refund if the tax withholding was too excessive.
This deduction is accessible whether or not you are taking the usual deduction or itemize your deductions. Nevertheless, it doesn’t decrease your AGI. 100% of your extra time pay will nonetheless be included in your AGI. It doesn’t make it simpler so that you can qualify for different tax advantages, such because the Little one Tax Credit score.
Greenback Cap
You might not be allowed to deduct all of your extra time pay premiums. There’s a $12,500 cap ($25,000 for married submitting collectively). You don’t get this tax deduction in the event you’re married submitting individually.
As a result of most individuals are paid time-and-a-half for extra time, a $12,500 cap for the premium portion of the extra time pay interprets into $25,000 on the common hourly fee for the extra time hours. In case your common hourly fee is $25/hour, it means you’ll be able to work 1,000 extra time hours in a yr earlier than you hit the cap. That’s like working 60 hours per week each week of the yr.
If you happen to’re married submitting collectively, and solely certainly one of you has extra time pay, your cap is twice as excessive as that for a single particular person.
Earnings Phaseout
The greenback cap drops slowly as your earnings will increase above $150,000 ($300,000 for married submitting collectively). It decreases by $100 for each $1,000 of earnings above the edge. The cap drops to zero when your earnings reaches $275,000 ($550,000 for married submitting collectively).
Most individuals received’t be affected by the earnings phaseout as a result of each the greenback cap and the phaseout threshold are set sufficiently excessive.
Each Extra time and Suggestions
“No Tax on Extra time” and “No Tax on Suggestions” are unbiased of one another. You qualify for each in the event you obtain each extra time pay and suggestions (or one particular person in a married couple will get extra time and the opposite will get suggestions). If you happen to’re 65 or older, you additionally qualify for the Senior Deduction.
Calculator
I made a calculator that will help you estimate your federal earnings tax earlier than and after “No Tax on Extra time” and “No Tax on Suggestions.” Use the calculator to see how a lot you’ll profit. Go away the information discipline at 0 in the event you don’t obtain suggestions.
If you happen to’re married submitting collectively, please embody earnings from each of you.
The calculator estimates taxes utilizing primary assumptions. It assumes the extra time hours are paid time-and-a-half. Your taxes could also be completely different you probably have a extra complicated state of affairs.
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The brief takeaway from “No Tax on Extra time” is that it isn’t what you assume. “No Tax on Extra time” means no tax on 1/3 of the gross extra time pay for most individuals.
You’ll discover extra deep dives on latest adjustments from the 2025 Trump tax regulation within the full OBBBA collection.
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