Trump's Overtime Tax Exemption: A Law With Hidden Limits

Understanding the “Big Beautiful Bill” and Its Impact on Overtime Pay

The phrase “the only two certainties in life are death and taxes” has long been a part of American culture. However, a recent piece of legislation known as the “Big Beautiful Bill” claims to eliminate one of those certainties—at least for overtime hours. This budget bill, passed in July, was intended to fulfill a key promise from the Trump administration: eliminating taxes on overtime pay. The law is retroactive to the beginning of 2025, offering workers an additional six months of tax-free wages before the full benefits kick in.

But while the law sounds promising, its real-world impact may not be as generous as it appears. Before you start planning how to spend your extra cash, it's important to understand the nuances and limitations of this new policy.

Not All Overtime Pay Is Tax-Exempt

One of the most significant points to consider is that not all overtime pay is tax-exempt under the new law. The White House claimed the law “makes good on President Trump’s campaign promises and benefits hardworking Americans where they need it the most—on their paychecks.” While there is some truth to this, the reality is more complex.

According to the Wall Street Journal, the tax break applies only to a portion of overtime pay. Specifically, it covers the “half” of the “time and a half” pay required under the federal Fair Labor Standards Act (FLSA). For example, if a worker earns $40 per hour, their time and a half overtime would be $60 per hour. Of that, only $20 (the “half” part) remains tax-free.

Additionally, the tax exemption is limited to federal income tax. State and local income taxes still apply unless a specific state has adopted the same rule. Social Security and Medicare taxes are also withheld on all wages, including overtime.

There is also a cap on the amount of overtime that can be tax-exempt. The limit is $12,500 per person annually or $25,000 for couples filing jointly. Workers earning more than $150,000 (or $300,000 combined for couples) are not eligible for the tax-free overtime benefit.

Disparities in Treatment

Another concern raised by Forbes is the issue of horizontal equity. Two individuals with the same annual income may end up taxed differently depending on their employment structure. Hourly workers who log FLSA overtime can deduct part of that overtime, while salaried workers who put in the same extra hours receive no such benefit.

Moreover, certain workers whose overtime pay is governed by different agreements or laws may not qualify for the deduction. For instance, airline and railroad workers covered by the Railway Labor Act often receive overtime pay under union contracts but are exempt from FLSA requirements. These workers generally do not qualify for the tax break on their contract-based overtime.

This discrepancy can lead to unequal treatment of similar jobs. An airline jet mechanic, for example, would not get the deduction, while an airplane mechanic at a separate maintenance company could.

Long-Term Implications

Beyond the immediate financial effects, the law may have broader implications. The Economic Policy Institute (EPI) has expressed concerns that the law could encourage employees to work excessive overtime, potentially leading to negative impacts on physical and mental health, well-being, and productivity.

Additionally, workers unable to work overtime due to personal or health reasons may miss out on the benefits. EPI has criticized the law as a “gimmick” that does more harm than good, suggesting that offering raises instead of encouraging overtime might be a better solution.

Forbes also labeled the law as a “stealth anti-job creation measure,” arguing that it reduces the need for employers to hire additional workers. A 50-hour week for one employee could be replaced by adding 10 hours across five separate workers, which could lead to a concentration of hours among fewer people.

Who Benefits?

According to estimates from the Tax Policy Center, only 9% of American households will actually save money through this policy, resulting in an average annual windfall of about $1,400. Most workers will see the benefit during tax time rather than immediately.

Finally, it’s worth noting that the “no tax on overtime pay” provision is set to expire in 2028. This means that the benefits of the law are temporary and may not provide long-term relief for many workers.