The brand new 2025 Trump tax legislation contains provisions for “No Tax on Suggestions” and “No Tax on Time beyond regulation.” I lined “No Tax on Suggestions” in a special submit. Let’s look into “No Tax on Time beyond regulation” now. For those who earn each ideas and time beyond regulation pay, you’ll be able to profit from each!
Non-Exempt W-2 Workers
Generally, solely W-2 workers are entitled to time beyond regulation pay. Unbiased contractors paid by a 1099 don’t qualify for time beyond regulation. Nor do self-employed enterprise house owners.
Amongst W-2 workers, for essentially the most half, solely hourly (“non-exempt”) workers are entitled to time beyond regulation pay. Most salaried (“exempt”) workers don’t obtain time beyond regulation pay, whatever the variety of hours they work in every week.
Some salaried workers aren’t paid excessive sufficient to qualify as exempt workers. They’re nonetheless categorised as non-exempt and are entitled to time beyond regulation pay.
Exempt and non-exempt discuss with the necessities mandated by the Honest Labor Requirements Act of 1938. Being exempt signifies that the employer isn’t required to comply with these necessities in its employment relationship with you. Your employer will let you know whether or not you’re exempt or non-exempt in case you’re unsure.
For those who’re presently a salaried exempt worker, it’s unlikely that your employer is keen to re-classify you as non-exempt and provide the benefit of “No Tax on Time beyond regulation.” Having you as a non-exempt worker would topic the employer to many necessities from the Honest Labor Requirements Act. An employer desires to search out each cause to make an worker exempt from these necessities.
For those who’re an exempt worker and your employer voluntarily pays you further for further work, it nonetheless doesn’t rely. The brand new tax legislation limits “No Tax on Time beyond regulation” to compensation “required below part 7 of the Honest Labor Requirements Act of 1938.” The additional pay doesn’t rely as a result of exempt workers aren’t required to be paid for time beyond regulation.
Not What You Suppose
The Honest Labor Requirements Act requires that time beyond regulation have to be paid a minimum of 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 price is $30/hour and also you’re paid $45/hour for time beyond regulation. You obtain $450 in gross time beyond regulation pay whenever you work 10 time beyond regulation hours in every week. You’d assume that “No Tax on Time beyond regulation” means you don’t pay tax on that $450, however that’s not the way it works.
“No Tax on Time beyond regulation” covers solely the pay premium over and above your common hourly price. The “No Tax” half applies to $150 out of the $450 gross time beyond regulation pay for these 10 hours. You continue to pay taxes as typical on $300 earned at your common $30/hour price for the time beyond regulation hours.
Because of this, in case your time beyond regulation hours are paid time-and-a-half, you’ll don’t have any tax on just one/3 of your gross time beyond regulation pay. For those who’re paid double time, you’ll don’t have any tax on 1/2 of the gross time beyond regulation pay.
Non permanent Window
As is the case with a number of different provisions within the 2025 Trump tax legislation affecting particular person taxpayers, “No Tax on Time beyond regulation” is just 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 modifications to payroll tax withholding to deal with time beyond regulation pay in another way, however the modifications received’t begin till 2026. You received’t see any change in your paychecks in 2025 except you modify your tax withholding along with your employer.
Tax Deduction
The IRS will add a spot on the W-2 type for employers to interrupt out the time beyond regulation pay premium. Till then, your employer can report back to you outdoors the W-2. You should have a brand new tax deduction in your time beyond regulation pay premium whenever you file your tax return. You’ll get the next tax refund if the tax withholding was too excessive.
This deduction is on the market whether or not you’re taking the usual deduction or itemize your deductions. Nonetheless, it doesn’t decrease your AGI. 100% of your time beyond regulation 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 Baby Tax Credit score.
Greenback Cap
You might not be allowed to deduct all of your time beyond regulation pay premiums. There’s a $12,500 cap ($25,000 for married submitting collectively). You don’t get this tax deduction in case you’re married submitting individually.
As a result of most individuals are paid time-and-a-half for time beyond regulation, a $12,500 cap for the premium portion of the time beyond regulation pay interprets into $25,000 on the common hourly price for the time beyond regulation hours. In case your common hourly price is $25/hour, it means you’ll be able to work 1,000 time beyond regulation hours in a 12 months earlier than you hit the cap. That’s like working 60 hours per week each week of the 12 months.
For those who’re married submitting collectively, and solely certainly one of you has time beyond regulation pay, your cap is twice as excessive as that for a single individual.
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 brink. 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 Time beyond regulation and Suggestions
“No Tax on Time beyond regulation” and “No Tax on Suggestions” are impartial of one another. You qualify for each in case you obtain each time beyond regulation pay and ideas (or one individual in a married couple will get time beyond regulation and the opposite will get ideas). For those who’re 65 or older, you additionally qualify for the Senior Deduction.
Calculator
I made a calculator that can assist you estimate your federal earnings tax earlier than and after “No Tax on Time beyond regulation” and “No Tax on Suggestions.” Use the calculator to see how a lot you’ll profit. Go away the guidelines subject at 0 in case you don’t obtain ideas. [Email readers: The calculator doesn’t work in emails. Please go to the website to try the calculator.]
For those who’re married submitting collectively, please embrace earnings from each of you.
The calculator estimates taxes utilizing fundamental assumptions. It assumes the time beyond regulation hours are paid time-and-a-half. Your taxes could also be totally different you probably have a extra complicated situation.
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You’ll discover extra deep dives on latest modifications from the 2025 Trump tax legislation within the full OBBBA sequence.
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