The brand new 2025 Trump tax regulation contains provisions for “No Tax on Ideas” and “No Tax on Additional time.” I lined “No Tax on Ideas” in a unique submit. Let’s look into “No Tax on Additional time” now. When you earn each ideas and extra time pay, you possibly can profit from each!
Non-Exempt W-2 Staff
Typically, 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 every week.
Some salaried staff aren’t paid excessive sufficient to qualify as exempt staff. They’re nonetheless categorised as non-exempt and are entitled to extra time pay.
Exempt and non-exempt discuss with the necessities mandated by the Honest Labor Requirements Act of 1938. Being exempt implies that the employer isn’t required to observe these necessities in its employment relationship with you. Your employer will let you know whether or not you’re exempt or non-exempt should you’re unsure.
When 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 Additional time.” Having you as a non-exempt worker would topic the employer to many necessities from the Honest Labor Requirements Act. An employer needs to seek out each motive to make an worker exempt from these necessities.
When you’re an exempt worker and your employer voluntarily pays you further for further work, it nonetheless doesn’t rely. The brand new tax regulation limits “No Tax on Additional time” to compensation “required beneath part 7 of the Honest Labor Requirements Act of 1938.” The additional pay doesn’t rely as a result of exempt staff aren’t required to be paid for extra time.
Not What You Assume
The Honest Labor Requirements Act requires that extra time should be paid at the least 1-1/2 instances the common hourly wage (“time-and-a-half”). Some state legal guidelines and union contracts require double time in some eventualities. Some employers voluntarily pay double time for holidays.
Suppose your common hourly price is $30/hour and also you’re paid $45/hour for extra time. You obtain $450 in gross extra time pay if you work 10 extra time hours in every week. You’ll suppose that “No Tax on Additional time” means you don’t pay tax on that $450, however that’s not the way it works.
“No Tax on Additional time” covers solely the pay premium over and above your common hourly price. The “No Tax” half applies to $150 out of the $450 gross extra time pay for these 10 hours. You continue to pay taxes as traditional on $300 earned at your common $30/hour price for the extra time hours.
Because of this, in case your extra time hours are paid time-and-a-half, you’ll haven’t any tax on just one/3 of your gross extra time pay. When you’re paid double time, you’ll haven’t any tax on 1/2 of the gross extra time pay.
Short-term Window
As is the case with a number of different provisions within the 2025 Trump tax regulation affecting particular person taxpayers, “No Tax on Additional 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 cut back your state taxes.
The IRS will make modifications to payroll tax withholding to deal with extra time pay in a different way, however the modifications gained’t begin till 2026. You gained’t see any change in your paychecks in 2025 until you modify your tax withholding together with your employer.
Tax Deduction
The IRS will add a spot on the W-2 type for employers to interrupt out the extra time pay premium. Till then, your employer can report back to you outdoors the W-2. You’ll have a brand new tax deduction on your extra time pay premium if you file your tax return. You’ll get a better tax refund if the tax withholding was too excessive.
This deduction is on the market whether or not you’re taking the usual deduction or itemize your deductions. Nonetheless, 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 Little one 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 should 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 price for the extra time hours. In case your common hourly price is $25/hour, it means you possibly can work 1,000 extra time hours in a yr earlier than you hit the cap. That’s like working 60 hours per week each week of the yr.
When 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 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 gained’t be affected by the revenue phaseout as a result of each the greenback cap and the phaseout threshold are set sufficiently excessive.
Each Additional time and Ideas
“No Tax on Additional time” and “No Tax on Ideas” are impartial of one another. You qualify for each should you obtain each extra time pay and ideas (or one particular person in a married couple will get extra time and the opposite will get ideas). When you’re 65 or older, you additionally qualify for the Senior Deduction.
Calculator
I made a calculator that will help you estimate your federal revenue tax earlier than and after “No Tax on Additional time” and “No Tax on Ideas.” Use the calculator to see how a lot you’ll profit. Go away the ideas discipline 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.]
When you’re married submitting collectively, please embrace revenue from each of you.
The calculator estimates taxes utilizing fundamental assumptions. It assumes the extra time hours are paid time-and-a-half. Your taxes could also be completely different when you have a extra advanced situation.
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You’ll discover extra deep dives on latest modifications from the 2025 Trump tax regulation within the full OBBBA sequence.
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