---
title: "New “No Tax on Overtime” Law: Employer Guide"
description: The 2025 no tax on overtime law is here. See who qualifies, employer reporting rules and what HR leaders must do to stay compliant.
image: https://blog.axcethr.com/hubfs/no-tax-on-overtime-_1200-x-628-px_%20(1).webp
---

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New “No Tax on Overtime” Law: Employer Guide

3:58

# Breaking Down the New “No Tax on Overtime” Law for Small Businesses

 By [Jo McClure, CPP](https://blog.axcethr.com/author/jo-mcclure) on [Aug 26, 2025](https://blog.axcethr.com/no-tax-on-overtime-law)   
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The “no tax on overtime” provision in the recently enacted “One Big Beautiful Bill” is expected to put more money in the pockets of [20 million](https://www.whitehouse.gov/obbb/) overtime-eligible workers. The tax change will also bring about additional [payroll processing](https://www.axcethr.com/services/payroll-and-tax-administration-services/payroll-services/),[payroll tax](https://www.axcethr.com/services/payroll-and-tax-administration-services/certified-payroll-tax-services/) and [payroll compliance](https://www.axcethr.com/services/payroll-and-tax-administration-services/payroll-compliance/) changes for human resource professionals.    

Here’s a how-to guide to help small and mid-sized businesses understand and navigate the new tax law. 

## Unpacking “No Tax on Overtime” 

The “no tax on overtime” is a tax deduction, not an exemption. The new provision, which sunsets in 2028, allows eligible employees – generally, but not always, those who are paid hourly – to deduct qualifying overtime compensation from their federal taxable income on their annual tax returns. 

Further, “overtime” in the new ruling is defined not as the full-time-and-a-half pay employees typically receive for working longer hours, but rather as the extra compensation they receive over and above their normal wages.  

The overtime change is retroactive to Jan. 1, 2025, so eligible workers can deduct qualifying overtime on their 2025 tax returns. This is a temporary tax deduction that workers can claim on their 2025-2028 income tax returns.   

The law allows workers to deduct up to $12,500, or $25,000 for married couples filing jointly. For people who earn more than $150,000 in individual income, the deduction phases out incrementally. 

💡Tip: “No tax on overtime” is federal legislation. State overtime taxation may be different.  

[![No-Tax-on-Tips-Law-_1_ (1)](https://no-cache.hubspot.com/cta/default/2652187/interactive-194825729427.png)](https://blog.axcethr.com/hs/cta/wi/redirect?encryptedPayload=AVxigLKydPueQJyoGIJBN0HmjV1j7nqb2ewa9rKWfA8q3XWxYnKYnm9ogbXI10ar8Nj7hvowXPhGJbv%2BG7Lk9bratAPnE7eZg54InIrfjY7wMFs5%2FqkjadxFBrTme2DQY0pwmlUGSPdMn8j%2BaeeYPW00yy9szlTYgAyGcoLDGBcFt7LEP2MK8t%2Bv%2BHXXYKe0jHk%3D&webInteractiveContentId=194825729427&portalId=2652187)

## Classifying Eligible Employees 

Keeping good employee records and accurately determining which employees are eligible for overtime will help small businesses comply with the law. 

Generally, employees who meet the criteria below are eligible for the overtime exemption: 

### Hourly Employees 

- Non-exempt under the Fair Labor Standards Act (FLSA) 
- Work more than 40 hours per week, with hours beyond 40 paid at time-and-a-half 
- Hold a valid Social Security number 

### Salaried Employees 

Most salaried professionals are exempt and won’t qualify, but these salaried roles meet the criteria: 

- Non-exempt under FLSA 
- Earn less than $150,000 per year 
- Document all overtime hours and pay 

RELATED: [The Surprising ROI of Payroll Outsourcing for Small Businesses >>](https://blog.axcethr.com/key-benefits-of-outsourcing-your-payroll)

## Implementing Payroll Administration Changes  

The new overtime pay tax rules add compliance responsibilities to small business operations. The immediate concerns include ensuring overtime-eligible workers are classified correctly and that overtime records are accurate back to Jan. 1, 2025.  

Companies can anticipate a demand for employee reclassifications or staffing shifts and ongoing employee inquiries about the new tax law. 

[![Big-Beautiful-Bill-Act-_1400-x-732-px_-_1_ (2)](https://no-cache.hubspot.com/cta/default/2652187/interactive-194824521301.png)](https://blog.axcethr.com/hs/cta/wi/redirect?encryptedPayload=AVxigLLHqYoVemv1iTNa2U5ff58X7BqY68Bez387ONGlyvdE5443ubvK1yobteVK%2B%2FA%2F3ejB3d1NbZrDnTAGB1R1oddOOKJUb2vHZS7oCvAUmZCPaiuvVaYZmj5CjRWYAYKQ5vrvdZmgViFB5QqWmcyiPuL6e2e%2F4yMx9Ybg%2FFIgIyU%2BS%2FrQ8CYynuBcd4KYg4JofS6Bh2dH7AzmFaaIPrGGPjvELPBuyaKA5g%3D%3D&webInteractiveContentId=194824521301&portalId=2652187)

## Employer Reporting Requirements

In addition to properly classifying employees and maintaining accurate overtime records, employers must also comply with new reporting rules.

Specifically, employers are required to separately track and report the amount of qualified overtime compensation on each employee’s Form W-2. This means overtime premiums must be reported distinctly from regular wages.

The IRS is expected to release further guidance on the exact mechanics of this reporting requirement. Until then, employers should ensure their payroll systems are set up to track overtime pay separately so they are prepared to meet the new standard.

RELATED: [When to Consider Switching Employees from Salary to Hourly Pay >>](https://blog.axcethr.com/when-hourly-met-salary-should-you-switch-salaried-exempt-employees-to-hourly-pay)

## Alleviating Payroll Pain Points 

Federal tax law changes can overburden small businesses. Companies that outsource their payroll administration to Axcet HR Solutions, a [certified professional employer organization](https://blog.axcethr.com/cpeo-vs-peo), can rest assured they are compliant with ever-changing state and federal tax laws. To manage the requirements of the new “no tax on overtime” and other federal pay regulations, [schedule a consultation](https://www.axcethr.com/schedule-consultation/) today.

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[![Jo McClure, CPP](https://blog.axcethr.com/hs-fs/hubfs/Jo-24.jpg?width=80&height=80&name=Jo-24.jpg)](https://blog.axcethr.com/author/jo-mcclure)

Written by

#### [Jo McClure, CPP](https://blog.axcethr.com/author/jo-mcclure)

Jo McClure, CPP, is the Director of Payroll Administration at Axcet HR Solutions, where she has been a pivotal leader for over 20 years. With more than two decades of experience in payroll outsourcing and professional employer organizations (PEOs), Jo specializes in helping small to mid-sized businesses navigate payroll administration, employee benefits, and compliance.

Her strategic leadership at Axcet focuses on implementing best practices in payroll management, compliance auditing, and risk mitigation. Jo obtained her Certified Payroll Professional (CPP) designation in 2006 and has held numerous leadership roles in the Greater Kansas City Chapter of the American Payroll Association, including President, Vice President, and Chapter Coordinator. A frequent speaker at the Midwest Regional Payroll Conference, she has also contributed articles to publications such as *Thinking Bigger Business* and *Kansas City Small Business Monthly*.

Jo’s expertise has been recognized through industry publications. She co-authored the article *“High-Touch in the Age of High-Tech: How PEOs Can Embrace AI Without Losing Their Humanity”* https://peoinsider.org/articles/high-touch-in-the-age-of-high-tech-how-peos-can-embrace-ai-without-losing-their-humanity/ for PEO Insider (March 2026), alongside Jeanette Coleman, SPHR, SHRM-SCP, and authored *“PEOs in the Community: Axcet Making Philanthropy Part of the Company’s Culture”* https://peoinsider.org/articles/peos-in-the-community-axcet-making-philanthropy-part-of-the-companys-culture/ (November 2025). These contributions reflect her perspective on balancing technology-driven payroll and HR processes with the human experience, as well as the role of community engagement in building strong organizational cultures.

Jo's specialties include payroll implementation, compliance auditing, and crafting best-practice payroll solutions that ensure businesses stay compliant while optimizing their processes.

 Published in: PEO Insider

Read more

<https://www.axcethr.com/> <https://www.linkedin.com/in/jomcclurekcpayroll> [View all posts →](https://blog.axcethr.com/author/jo-mcclure)

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  "articleBody" : "The “no tax on overtime” provision in the recently enacted “One Big Beautiful Bill” is expected to put more money in the pockets of 20 million overtime-eligible workers. The tax change will also bring about additional payroll processing, payroll tax and payroll compliance changes for human resource professionals. Here’s a how-to guide to help small and mid-sized businesses understand and navigate the new tax law. Unpacking “No Tax on Overtime” The “no tax on overtime” is a tax deduction, not an exemption. The new provision, which sunsets in 2028, allows eligible employees – generally, but not always, those who are paid hourly – to deduct qualifying overtime compensation from their federal taxable income on their annual tax returns. Further, “overtime” in the new ruling is defined not as the full-time-and-a-half pay employees typically receive for working longer hours, but rather as the extra compensation they receive over and above their normal wages. The overtime change is retroactive to Jan. 1, 2025, so eligible workers can deduct qualifying overtime on their 2025 tax returns. This is a temporary tax deduction that workers can claim on their 2025-2028 income tax returns. The law allows workers to deduct up to $12,500, or $25,000 for married couples filing jointly. For people who earn more than $150,000 in individual income, the deduction phases out incrementally. 💡Tip: “No tax on overtime” is federal legislation. State overtime taxation may be different. Classifying Eligible Employees Keeping good employee records and accurately determining which employees are eligible for overtime will help small businesses comply with the law. Generally, employees who meet the criteria below are eligible for the overtime exemption: Hourly Employees Non-exempt under the Fair Labor Standards Act (FLSA) Work more than 40 hours per week, with hours beyond 40 paid at time-and-a-half Hold a valid Social Security number Salaried Employees Most salaried professionals are exempt and won’t qualify, but these salaried roles meet the criteria: Non-exempt under FLSA Earn less than $150,000 per year Document all overtime hours and pay RELATED: The Surprising ROI of Payroll Outsourcing for Small Businesses &gt;&gt; Implementing Payroll Administration Changes The new overtime pay tax rules add compliance responsibilities to small business operations. The immediate concerns include ensuring overtime-eligible workers are classified correctly and that overtime records are accurate back to Jan. 1, 2025. Companies can anticipate a demand for employee reclassifications or staffing shifts and ongoing employee inquiries about the new tax law. Employer Reporting Requirements In addition to properly classifying employees and maintaining accurate overtime records, employers must also comply with new reporting rules. Specifically, employers are required to separately track and report the amount of qualified overtime compensation on each employee’s Form W-2. This means overtime premiums must be reported distinctly from regular wages. The IRS is expected to release further guidance on the exact mechanics of this reporting requirement. Until then, employers should ensure their payroll systems are set up to track overtime pay separately so they are prepared to meet the new standard. RELATED: When to Consider Switching Employees from Salary to Hourly Pay &gt;&gt; Alleviating Payroll Pain Points Federal tax law changes can overburden small businesses. Companies that outsource their payroll administration to Axcet HR Solutions, a certified professional employer organization, can rest assured they are compliant with ever-changing state and federal tax laws. To manage the requirements of the new “no tax on overtime” and other federal pay regulations, schedule a consultation today.",
  "author" : {
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  "dateCreated" : "2025-08-26",
  "dateModified" : "2025-08-26",
  "datePublished" : "2025-08-26",
  "description" : "The “no tax on overtime” provision in the recently enacted “One Big Beautiful Bill” is expected to put more money in the pockets of 20 million overtime-eligible workers. The tax change will also bring about additional payroll processing, payroll tax and payroll compliance changes for human resource professionals. Here’s a how-to guide to ...",
  "editor" : "Jo McClure, CPP",
  "genre" : "Human Resources and Employee Management",
  "headline" : "New “No Tax on Overtime” Law: Employer Guide",
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