No Tax on Overtime—What You Need to Know

Overtime just got a tax twist. Thanks to a new federal law, many workers and employers can now deduct a portion of overtime from their federal taxable income, effective retroactively to January 1, 2025. That’s big news for payroll, employee communications, and year-end reporting. Here at Edgewater CPA Group, our team is breaking it down so you can move from “Wait, what?” to “We’ve got this.”

What Has Changed

The federal “No Tax on Overtime” provision lets qualifying employees deduct the overtime premium (the “half” in time-and-a-half) from federal taxable income. However, caps apply: up to $12,500 for most single filers and $25,000 for married filing jointly, with phase-outs at higher incomes. This applies to 2025–2028 under the broader federal tax package. Employers don’t stop withholding income tax on OT now – employees typically realize the benefit at filing time.

Indiana Angle: Federal vs. State

Don’t mix the wires: this is a federal deduction. Indiana income tax still applies unless and until the state updates conformity. Many states piggyback on the IRC, but not always instantly or fully – be sure to watch for state guidance before making any changes to state withholding assumptions.

Who Benefits

Not everyone benefits from this change. The deduction targets non-exempt W-2 employees with qualifying OT, and savings vary by income and hours worked. Independent estimates suggest fewer than one in ten filers will use it, so set expectations accordingly during benefits and bonus conversations.

Payroll & HR: What to Do Now

• Track the OT premium separately: Configure payroll so the overtime premium portion is distinct on the ledger and visible on pay stubs. That makes year-end support and employee communications much easier.

• Stay the course on withholding: The IRS hasn’t deployed new 2025 withholding tables for this change; ad-hoc tweaks risk under- or over-withholding. Expect employees to claim the deduction on their 2025 returns (likely via an IRS form/schedule).

• Publish a simple employee FAQ: Cover what counts as OT, what doesn’t, the caps, phase-outs, and the reminder that FICA and Indiana tax still apply. Link to the official IRS pages as they become available.

• Watch year-end reporting guidance: Keep an eye on the IRS newsroom for any instructions that affect W-2 box reporting or new schedules for 2025 returns. Your payroll provider should push updates—verify they map to your chart of accounts cleanly.

How Edgewater CPA Group Can Help

If all of this feels like a lot, you don’t have to sort it out alone. The Edgewater CPA Group team in Carmel, IN, can review your payroll setup and keep your team up to date, so you can focus on running the business you love. We’re here for the everyday things, too, from bookkeeping and tax preparation that just works. Ready for a clearer path forward? Schedule your consultation at (317) 386-7021.