The question on everyone’s mind—when does no tax on overtime start—has taken center stage in payroll and political discussions across the United States. As of July 2, 2025, the much-anticipated federal tax exemption on overtime pay is closer than ever to becoming reality, with Congress advancing major legislation that could see millions of American workers keeping more of their hard-earned overtime income.
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No Tax on Overtime Start Date: Where the Law Stands Now
In late June 2025, the U.S. Senate narrowly passed its version of the “One Big Beautiful Bill Act,” following the House’s approval in May. Both versions include the landmark “no tax on overtime” provision, which would allow eligible workers to deduct overtime pay from their federal taxable income for tax years 2025 through 2028. The final step before it becomes law is reconciliation between the House and Senate versions, followed by the president’s signature.
If the bill is signed into law as expected, the no tax on overtime rule would take effect for the 2025 tax year. This means workers would see the benefit when filing their 2025 tax returns—typically in early 2026. However, payroll systems and W-2 reporting requirements would need to be updated in late 2025 to reflect the new law.
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Key Points: No Tax on Overtime Start
- The tax exemption would apply to overtime pay earned under the Fair Labor Standards Act (FLSA)—that is, hours worked beyond 40 in a week at time-and-a-half rates.
- Only federal income tax is affected. Social Security and Medicare taxes would still apply to overtime earnings.
- The deduction is available to employees earning up to $160,000 per year and does not extend to independent contractors or highly compensated employees.
- The change is temporary, covering tax years 2025–2028.
- Employers must separately report overtime pay on W-2 forms starting with the 2025 tax year.
Why the No Tax on Overtime Start Date Matters
For millions of frontline and hourly workers, the no tax on overtime start date could mean an immediate boost in take-home pay. The White House estimates the average overtime worker could see a tax cut between $1,400 and $1,750 per year under the new law. This is especially significant as wages struggle to keep pace with inflation and the cost of living rises.
Employers, meanwhile, are preparing for major changes in payroll processing and tax reporting. Payroll software will need updates to track and report overtime pay separately, and HR departments are bracing for increased demand for overtime shifts as employees seek to maximize their tax-free earnings.
Potential Impact and Controversy
While the prospect of untaxed overtime is popular among workers, the proposal is not without controversy. The Tax Foundation projects a potential federal revenue loss ranging from $145 million to $3.1 trillion over the next decade, raising concerns about funding for programs like Medicaid. Critics also point out that salaried workers, who are often ineligible for overtime, may feel left out of the tax break.
Additionally, some experts warn that employers might lean more heavily on overtime instead of hiring new staff, potentially increasing workloads for existing employees. The administration has promised safeguards, but the fine print is still being finalized.
How the No Tax on Overtime Start Date Compares: Alabama’s Early Experiment
While the federal law is still pending, Alabama has already implemented a state-level overtime tax exemption. Since October 1, 2024, overtime pay in Alabama has been exempt from state income tax, with the pilot program set to run through June 20, 2025. This early experiment offers a glimpse of how a national rollout could unfold, though no other states have followed suit yet.
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Summary Table: No Tax on Overtime Start Date Details
| Provision | Federal Proposal (Pending) | Alabama (State Pilot) |
|---|---|---|
| Start Date | 2025 tax year (filed in 2026) | Oct 1, 2024 – Jun 20, 2025 |
| Who Qualifies | Employees earning <$160,000/year | All FLSA overtime workers |
| Income Types Covered | Overtime under FLSA | Overtime under FLSA |
| Taxes Affected | Federal income tax only | State income tax only |
| Payroll Reporting | Overtime on W-2, new deduction | Standard state reporting |
| Duration | 2025–2028 (if enacted) | 9-month pilot |
What Should Workers and Employers Do Now?
- Employees should track their overtime hours and stay informed about changes to their paychecks and W-2 forms for 2025.
- Employers need to prepare payroll systems for potential new reporting requirements and communicate updates to staff as the law progresses.
Key Point Summary
- The no tax on overtime provision is expected to start with the 2025 tax year, pending final passage and signature into law.
- The tax break covers federal income tax on overtime pay for eligible workers, not Social Security or Medicare.
- The law is temporary (2025–2028) and includes income and eligibility limits.
- Alabama’s state-level pilot offers a preview, but the federal law will have broader impact.
- Both employees and employers should prepare for new payroll and reporting processes.
Stay tuned for the latest updates on the no tax on overtime start date as Congress moves to finalize this historic change. Subscribe now for real-time alerts and expert payroll guidance as soon as the law is signed.