No Tax on Overtime in 2025: What Workers and Employers Need to Know
No Tax on Overtime in 2025: What Workers and Employers Need to Know
You may have seen headlines claiming that overtime pay will be tax-free starting in 2025. While that statement is partly true, the full picture is more nuanced. Understanding the limits, qualifications, and documentation requirements now can save you confusion and frustration when tax season arrives.
In a recent video, Nedda Lemman of Lemman Tax Accountant explains how the proposed overtime income tax exemption works, who qualifies, and what taxpayers should be doing to prepare. As a trusted tax accountant and bookkeeper serving Joplin, MO and Neosho, MO, Nedda helps individuals and small businesses navigate changing tax laws with confidence.
What Is the Overtime Income Tax Exemption?
Beginning in 2025, eligible employees may be able to exclude up to $25,000 of overtime pay from federal income tax. This exemption applies only to the overtime portion of wages — specifically time-and-a-half pay — not regular hourly wages.
It is important to note that this exemption applies to income tax only. Overtime wages are still subject to Social Security and Medicare taxes, which will continue to be reported and withheld through your W-2.
Who Qualifies for Tax-Free Overtime?
Not everyone who works extra hours will qualify for this exemption. To be eligible, you must:
Be classified as an employee (W-2 worker)
Work 40 or more hours per week
Earn overtime that is paid at time and a half
The exemption does not apply to:
Independent contractors or subcontractors
Certain professionals such as doctors, lawyers, and accountants
Additionally, the benefit begins to phase out at higher income levels:
$150,000 adjusted gross income for single filers
$300,000 adjusted gross income for married filing jointly
The Documentation Problem You Need to Know About
One of the biggest issues taxpayers will face is documentation. As it currently stands, 2025 W-2 forms do not separate regular wages from overtime wages.
That means your tax preparer will not be able to determine how much of your income qualifies for the exemption using your W-2 alone.
To file correctly, you will need additional documentation, such as:
Your final pay stub of the year
Payroll records showing a clear breakdown of regular time versus overtime
A written statement or letter from your employer confirming the overtime totals
Without this information, your tax return may not be prepared accurately.
What Employees Should Do Now
If you regularly work overtime, it is smart to start planning ahead:
Save your pay stubs throughout the year
Ask your employer how overtime will be tracked and reported
Make sure payroll records clearly separate regular and overtime wages
Being proactive now can prevent delays or issues when it is time to file your return.
What Employers Need to Prepare For
Employers should be aware that employees may request detailed payroll documentation in 2025. Ensuring your payroll system can clearly distinguish overtime pay will be critical for your employees’ tax filings.
Clear records will reduce confusion, prevent disputes, and help your employees take advantage of the exemption if they qualify.
Get Professional Guidance
If you are searching for a reliable tax accountant or bookkeeper in Joplin, MO or Neosho, MO, getting professional guidance is especially important when tax laws change.
Tax law changes can be confusing, especially when new rules affect documentation and filing requirements. If you have questions about overtime income, eligibility, or how this exemption could impact your tax situation, professional guidance is strongly recommended.
Nedda Lemman of Lemman Tax Accountant is happy to help you understand how these changes apply to your specific situation.
Call 480-580-9876 to or visit our site to schedule a consultation or ask questions.
Staying informed now will help you avoid surprises later.
