Is the IRS’s 'No Tax on Overtime' Law Overhyped? Confusion Could Cost $5,000 or More

On July 4, 2025, the One Big Beautiful Bill was signed into law. Easily one of the most talked-about aspects of that bill was the "no tax on overtime" component, which was made retroactive to January 1, 2025.

It is no surprise that workers who work a lot of overtime hours were very excited about the IRS's rule change. But the reality of it is very different from the popular taglines, and misunderstandings of that could lead to people owing $5,000 or more to the IRS.

What ‘No Tax on Overtime’ Actually Covers

For months, there was extensive discussion in the American media about changing the laws so workers are charged "no tax on overtime." After the One Big Beautiful Bill was passed, it seemed like that had been achieved. However, the reality of the law falls far short of what many people understandably assumed.

An article on Intuit's TurboTax website reveals that most people who work overtime will still have to pay taxes on the vast majority of the money they make during those hours. As the website explains, it is only the premium part of the pay during those hours that is now tax-free.

"Despite the 'no tax on overtime' label, the deduction won’t completely eliminate taxes on all overtime pay. Yes, some people will pay no federal income tax on their overtime pay, but higher-income people may still owe income taxes on at least a part of the overtime compensation they receive. Plus, overtime pay is still subject to payroll taxes and, depending on where you live, maybe state or local income taxes, too."

For workers who get paid time and a half for overtime, full taxes still apply to the regular hourly portion of that. Only the premium part (half of the regular hourly rate for those people) qualifies for the deduction, which is also limited in another way. It is capped at $12,500 per year for individuals or $25,000 for joint filers, meaning any premium pay above that threshold becomes fully taxable too.

Why Filing Taxes Based on 'No Tax on Overtime' Assumptions Could Cost More Than $5,000 and Major Headaches

If workers assume they don't have to pay taxes on all of the money they make from overtime when they file with the IRS, they will be underpaying what they owe. Depending on how many extra hours they work and their salaries, people who make that mistake could be making an extremely costly mistake.

On the IRS's website, it states that underpaying your taxes can trigger the negligence or disregard of the rules or regulations penalty. That happening results in the person having to pay the government the underpaid figure, plus a penalty that is 20% of that amount. Additionally, a 0.5% interest rate is charged on the underpaid money monthly, to a maximum of 25% of the original debt.

Someone who gets paid enough overtime at a time-and-a-half rate to reach the $12,500 threshold would owe taxes on $25,000 for those hours alone. If they fail to pay that and the IRS deems them to have either knowingly or negligently done so, the 20% penalty would amount to $5,000 plus whatever interest they incur. That figure can go up too, if "no tax on overtime" assumptions make someone underpay their taxes by more than $25,000.

'No Tax on Overtime' Expires After 2028

Another major limitation of the "no tax on overtime" rule change is that it isn't permanent, as the IRS's website states that it will revert after the 2028 tax year. In fact, no tax on tips, no tax on social security, and no tax on car loan interest will all also expire at the same time. The only way those rule changes will last beyond that is if they get extended by Congress and the President.