The earlier submit coated “No Tax on Ideas” within the new 2025 Trump tax regulation. The identical regulation additionally has a brand new “No Tax on Extra time” provision. Let’s look into it. Should you earn each ideas and time beyond regulation pay, you may profit from each!
Non-Exempt W-2 Staff
Normally, solely W-2 staff 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 homeowners.
Amongst W-2 staff, for essentially the most half, solely hourly (“non-exempt”) staff are entitled to time beyond regulation pay. Most salaried (“exempt”) staff don’t obtain time beyond regulation pay, whatever the variety of hours they work in every week.
Some salaried staff aren’t paid excessive sufficient to qualify as exempt staff. They’re nonetheless categorized as non-exempt and entitled to time beyond regulation pay.
Exempt and non-exempt confer 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 inform you whether or not you’re exempt or non-exempt should you’re undecided.
Should you’re at present a salaried exempt worker, it’s unlikely that your employer is prepared to re-classify you as non-exempt and provide the benefit of “No Tax on Extra time.” 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.
Not What You Suppose
The Honest Labor Requirements Act requires that time beyond regulation have to be paid no less than 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 charge 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 Extra time” means you don’t pay tax on the $450, however that’s not the way it works.
“No Tax on Extra time” covers solely the pay premium over and above your common hourly charge. The “No Tax” half applies solely to $150 out of the $450 gross time beyond regulation pay for 10 hours. You continue to pay taxes as ordinary on the $300 earned at your common $30/hour charge for these hours.
In consequence, 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. Should you’re paid double time, you’ll don’t have any tax on 1/2 of the gross time beyond regulation pay.
Momentary Window
As is the case with a number of different provisions within the 2025 Trump tax regulation affecting particular person taxpayers, “No Tax on Extra time” is simply efficient between 2025 and 2028 (inclusive). It expires on the finish of 2028.
Tax Withholding
“No Tax” refers solely to the federal revenue 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 until you alter your tax withholding together with your employer.
Tax Deduction
The IRS will add a field to the W-2 type for employers to interrupt out the time beyond regulation premium. Till then, your employer can report the time beyond regulation pay to you outdoors the W-2. You should have a brand new tax deduction in your time beyond regulation pay premium. You’ll use it to reconcile together with your tax withholding. You’ll get the next tax refund if the tax withholding was too excessive.
This deduction is out there whether or not you are 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 Little one Tax Credit score.
Greenback Cap
You is probably not 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 should 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 charge for the time beyond regulation hours. In case your common hourly charge is $25/hour, it means you may work 1,000 time beyond regulation hours in a yr earlier than you hit the cap. That’s like working 60 hours per week each week of the yr.
Should you’re married submitting collectively, and solely one among you has time beyond regulation pay, your cap is twice as excessive as that for a single particular person.
Revenue Phaseout
The greenback cap drops slowly as your revenue will increase above $150,000 ($300,000 for married submitting collectively). It decreases by $100 for each $1,000 of revenue above the brink. The cap drops to zero when your revenue reaches $275,000 ($550,000 for married submitting collectively).
Most individuals received’t be affected by the revenue phaseout as a result of each the greenback cap and the phaseout threshold are set sufficiently excessive.
Each Extra time and Ideas
“No Tax on Extra time” and “No Tax on Ideas” are unbiased of one another. You qualify for each should you obtain each time beyond regulation pay and ideas. Should you’re 65 or older, you additionally qualify for the Senior Deduction. Should you take the usual deduction and also you donate to charities, you qualify for the charity donation deduction, too.
Calculator
I made a calculator that will help you estimate your federal revenue tax earlier than and after “No Tax on Extra time” and “No Tax on Ideas.” Use the calculator to see how a lot you’ll profit. Depart the guidelines area at 0 should you don’t obtain ideas. [Email readers: The calculator doesn’t work in emails. Please go to the website to try the calculator.]
Should you’re married submitting collectively, please embrace revenue from each of you.
The calculator estimates taxes utilizing primary assumptions. It assumes your time beyond regulation hours are paid time-and-a-half. Your taxes could also be totally different when you’ve got a extra advanced situation.
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You’ll discover extra deep dives on current modifications from the 2025 Trump tax regulation within the full OBBBA sequence.
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