New federal OT pay exemption on the books

A new federal tax exemption on overtime pay is in effect for 2025. The exemption allows individuals to deduct a portion of their overtime income from their taxes.

In effect, eligible individuals can deduct up to $12,500 ($25,000 if filing jointly) of overtime earnings from their taxable income. One does not have to itemize deductions to claim this tax break, and the deduction phases out for higher earners, starting at $150,000 in income for single filers ($300,000 for joint filers).

Also, the Department of Labor’s new overtime rule, which increases the salary threshold for overtime pay, is set to take effect. This means more workers will be eligible for overtime pay based on their salary level.

Here are some highlights of the new law:

• Tax Exemption: The new legislation allows for a federal income tax deduction on overtime pay, up to a certain limit.

• Employer Reporting: Employers will need to separately report overtime pay on employee W-2 forms.

• Overtime Rule Charges: The DOL overtime rule will adjust the salary threshold for overtime eligibility, potentially making more employees eligible for overtime pay

• Potential Impacts: The changes could impact how employers calculate and report overtime pay, and could lead to increased labor costs for some businesses.

It is important to note that Trump’s new tax bill doesn’t make all overtime pay fully exempt from federal income tax. Previously, overtime pay was taxed like regular wages, subject to federal and state income taxes and Social Security and Medicare withholding. Now, payroll and state/local taxes still apply on the deductible portion of the overtime pay.

Remember: With the new law, only the deductible portion of the federal tax on overtime pay is eliminated. Payroll taxes and state/local income taxes will still apply.

Barry Lisak is an IRS enrolled agent specializing in personal and small business taxes for 30 years. Any questions can be directed to him at 516-829-7283, or mrbarrytax@aol.com.