The earlier publish 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 extra time pay, you’ll be able to profit from each!
Non-Exempt W-2 Workers
Usually, solely W-2 staff are entitled to extra time pay. Impartial contractors paid by a 1099 don’t qualify for extra time. Nor do self-employed enterprise homeowners.
Amongst W-2 staff, for essentially the most half, solely hourly (“non-exempt”) staff are entitled to extra time pay. Most salaried (“exempt”) staff don’t obtain extra time pay, whatever the variety of hours they work in per week.
Some salaried staff aren’t paid excessive sufficient to qualify as exempt staff. They’re nonetheless categorised as non-exempt and entitled to extra time pay.
Exempt and non-exempt seek advice from the necessities mandated by the Truthful 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 let you know whether or not you’re exempt or non-exempt when you’re undecided.
Should you’re presently a salaried exempt worker, it’s unlikely that your employer is keen 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 Truthful Labor Requirements Act. An employer desires to search out each purpose to make an worker exempt from these necessities.
Not What You Suppose
The Truthful Labor Requirements Act requires that extra time should be paid no less than 1-1/2 instances 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 extra time. You obtain $450 in gross extra time pay while you work 10 extra time hours in per week. You’ll suppose 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 extra time pay for 10 hours. You continue to pay taxes as typical on the $300 earned at your common $30/hour charge for these hours.
Consequently, in case your extra time hours are paid time-and-a-half, you’ll don’t have any tax on only one/3 of your gross extra time pay. Should you’re paid double time, you’ll don’t have any tax on 1/2 of the gross extra time pay.
Non permanent 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 barely efficient between 2025 and 2028 (inclusive). It expires on the finish of 2028.
Tax Withholding
“No Tax” refers solely to the federal earnings tax. It doesn’t change the Social Safety and Medicare taxes withheld out of your paychecks. It doesn’t cut back your state taxes.
The IRS will make adjustments to payroll tax withholding to deal with extra time pay in a different way, however the adjustments gained’t begin till 2026. You gained’t see any change in your paychecks in 2025 except you modify your tax withholding together with your employer.
Tax Deduction
The IRS will add a field to the W-2 kind for employers to interrupt out the extra time premium. Till then, your employer can report the extra time pay to you exterior the W-2. You’ll have a brand new tax deduction in your extra time pay premium. You’ll use it to reconcile together with your tax withholding. You’ll get a better tax refund if the tax withholding was too excessive.
This deduction is accessible whether or not you’re taking the usual deduction or itemize your deductions. Nevertheless, it doesn’t decrease your AGI. 100% of your extra time 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 Baby Tax Credit score.
Greenback Cap
You is probably not allowed to deduct all of your extra time pay premiums. There’s a $12,500 cap ($25,000 for married submitting collectively). You don’t get this tax deduction when you’re married submitting individually.
As a result of most individuals are paid time-and-a-half for extra time, a $12,500 cap for the premium portion of the extra time pay interprets into $25,000 on the common hourly charge for the extra time hours. In case your common hourly charge is $25/hour, it means you’ll be able to work 1,000 extra time hours in a 12 months earlier than you hit the cap. That’s like working 60 hours per week each week of the 12 months.
Should you’re married submitting collectively, and solely considered one of you has extra time pay, your cap is twice as excessive as that for a single particular person.
Earnings Phaseout
The greenback cap drops slowly as your earnings will increase above $150,000 ($300,000 for married submitting collectively). It decreases by $100 for each $1,000 of earnings above the brink. The cap drops to zero when your earnings reaches $275,000 ($550,000 for married submitting collectively).
Most individuals gained’t be affected by the earnings 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 impartial of one another. You qualify for each when you obtain each extra time 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 can assist you estimate your federal earnings 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 information discipline at 0 when you don’t obtain ideas. (Electronic mail readers: The calculator doesn’t work in emails. Please go to the web site to attempt the calculator.)
Should you’re married submitting collectively, please embrace earnings from each of you.
The calculator estimates taxes utilizing primary assumptions. It assumes your extra time hours are paid time-and-a-half. Your taxes could also be completely different you probably have a extra advanced state of affairs.
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You’ll discover extra deep dives on latest adjustments from the 2025 Trump tax regulation within the full OBBBA collection.
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