N※N

New Overtime-Pay Tax Deduction Explained

  //business-finance.news-articles.net/content/202 .. 14/new-overtime-pay-tax-deduction-explained.html
  Published in Business and Finance on Sunday, December 14th 2025 at 10:11 GMT by Investopedia
      Locale: New York, UNITED STATES

How Workers Can Leverage the New Overtime‑Pay Tax Deduction: A Practical Guide

In the latest round of tax reforms, Congress introduced a new provision that lets wage‑earning employees deduct a portion of their overtime pay from taxable income. The change is part of a broader effort to make workers’ wages stretch further amid rising living costs. For most employees, however, taking advantage of the deduction will require a careful re‑examination of how overtime is calculated, recorded, and reported on tax returns. Below is a comprehensive overview of what the new rule means, who qualifies, how to compute overtime, and how to claim the deduction on your 2024 tax return.

1. The Tax Law at a Glance

What’s New?
- The Internal Revenue Code now allows a deduction for overtime wages earned during the taxable year.
- The deduction is only available to employees who are classified as “non‑exempt” under the Fair Labor Standards Act (FLSA) and receive overtime at the standard “time‑and‑a‑half” rate (or a higher rate if a collective bargaining agreement applies).
- The deduction is capped at the lesser of $50,000 in overtime wages or 10% of the employee’s total taxable wages for the year.

Why It Matters
For many wage earners, overtime can add a significant boost to annual income. By reducing the taxable portion of that boost, the new deduction can lower federal income tax, Social Security and Medicare withholding, and the overall tax liability.

2. Who Qualifies?

Important Caveat
If you’re a gig worker, contractor, or receive overtime as a lump‑sum bonus that isn’t itemized on a W‑2, you’ll not qualify for this deduction.

3. Calculating Overtime Pay

The calculation of overtime pay is the foundation for determining the amount you can deduct. Investopedia’s companion article “How to Calculate Overtime Pay” lays out the steps:

1. Determine Regular Hours
   - Typically 40 hours per week for non‑exempt workers.

2. Identify Overtime Hours
   - Any hours worked beyond the 40‑hour threshold in a week.

3. Apply the Overtime Rate
   - Multiply overtime hours by the overtime rate (usually 1.5 × regular hourly wage).

4. Add to Regular Pay
   - Total overtime pay = (Regular Hourly Rate × Overtime Hours × Overtime Rate)

Example
- Regular wage: $22/hour
- Week’s hours: 45
- Overtime hours: 5
- Overtime rate: 1.5 × $22 = $33/hour
- Overtime pay = 5 × $33 = $165

This $165 is the amount that could potentially be deducted, subject to the overall limits mentioned earlier.

4. Recording Overtime for Tax Purposes

• Payroll Statements: Employers are required to list overtime separately on pay stubs. If your stub lumps all wages together, request a revised statement or a payroll summary from HR.
• W‑2 Form: The overtime portion should appear in Box 1 (Wages, tips, other compensation) as part of your total wages. The new deduction does not alter the amount reported on the W‑2; it only reduces the amount that is taxed.
• Keeping Records: Maintain a spreadsheet or a simple log that tracks:
  • Dates of overtime
  • Hours worked
  • Regular hourly rate
  • Overtime rate
  • Total overtime pay per pay period

5. Claiming the Deduction on Your Tax Return

Step 1 – Determine the Deductible Amount
- Calculate total overtime wages for the year (sum all periods).
- Apply the deduction cap: whichever is lower—$50,000 or 10% of total wages.

Step 2 – Adjust Taxable Income
- On Form 1040, report the full wages in Box 1 of your W‑2.
- Use the “Adjustments to Income” line (Line 21 of the 2024 Form 1040) to reduce wages by the deduction amount.
- Example: If you earned $55,000 in wages and $12,000 in overtime, you may deduct $10,000 (10% of $55,000) or $12,000, whichever is lower.
- The adjusted gross income (AGI) is then calculated after this deduction.

Step 3 – Verify Compliance
- Ensure you also meet all other requirements (e.g., filing status, age limits).
- If you’re unsure, consult a tax professional or use IRS Free File services.

6. Potential Savings Illustrated

These illustrative numbers assume a 15% marginal tax rate and do not include Social Security or Medicare tax adjustments, which still apply to overtime wages.

7. Common Pitfalls & How to Avoid Them

8. Additional Resources

• What Is Overtime Pay? – A foundational article that defines overtime and explains the legal framework under FLSA.
• Tax Deductions 101 – Explains the difference between standard and itemized deductions and how the new deduction fits into the overall tax picture.
• IRS Publication 17 – The go‑to guide for individuals on how to file taxes, including sections on wages, withholdings, and adjustments.

9. Bottom Line

The new overtime‑pay deduction offers a tangible way for wage earners to keep more of the extra hours they work. By carefully calculating overtime, maintaining accurate records, and applying the deduction correctly on the tax return, employees can reduce their taxable income by up to $50,000—or 10% of their wages—whichever is smaller. The key is to treat overtime as a distinct, calculable category of income and to stay diligent in documenting it.

With the right preparation, the new deduction can translate into real dollars saved in the 2024 tax season and beyond. For personalized advice, consider speaking with a CPA or tax professional who can walk you through the exact numbers and ensure compliance with all IRS rules.