Overtime Pay Tax Relief Act of 2025
The Overtime Pay Tax Relief Act of 2025 would create a new above-the-line deduction for overtime pay under the Internal Revenue Code. Specifically, it would establish a deduction for overtime compensation that is equal to the portion of overtime pay that does not exceed 20% of an individual’s other wages earned from the same employer in the taxable year. Overtime is defined using the Fair Labor Standards Act (FLSA) standard (overtime required under FLSA Sec. 7). The deduction is limited by an adjusted gross income (AGI) cap: $200,000 for married couples filing jointly, $150,000 for heads of household, and $100,000 for all others. The deduction is temporary and ends after December 31, 2029. In addition, the bill would modify payroll withholding to reflect the deduction and make the deduction available to non-itemizers (i.e., those who claim the standard deduction), while also exempting it from certain itemized deduction limitations for itemizers. The bill would rename the existing section 224 to section 225 and insert the new section 224, so the deduction is titled “Overtime payments.”
Key Points
- 1New deduction: An amount equal to the portion of overtime compensation that does not exceed 20% of an individual’s other wages from the same employer for the tax year (the deduction is the lesser of overtime pay or 20% of other wages from the same employer).
- 2Definition of overtime: Overtime compensation is defined as overtime required under FLSA Section 7.
- 3Income limits: The deduction is phased out at AGI thresholds: $200,000 (married filing jointly), $150,000 (head of household), and $100,000 (all other filers).
- 4Sunset date: The deduction applies to amounts received after enactment but ends for amounts received after December 31, 2029.
- 5Tax treatment: The deduction is available to non-itemizers (treated as an above-the-line deduction) and is not subject to certain itemized deduction limitations (i.e., not treated as a miscellaneous deduction and not subject to the overall limitation on itemized deductions for itemizers).
- 6Withholding adjustments: The Treasury would modify withholding tables to reflect the deduction, affecting how much is withheld from wages.
- 7Structural changes: The bill renumbers and inserts sections so the new deduction sits as Sec. 224, with the existing Sec. 224 renumbered to Sec. 225.