The earlier publish lined “No Tax on Suggestions” within the new 2025 Trump tax regulation. The identical regulation additionally has a brand new “No Tax on Time beyond regulation” provision. Let’s look into it. For those who earn each suggestions and extra time pay, you possibly can profit from each!
Non-Exempt W-2 Staff
Normally, 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 probably 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 entitled to extra time pay.
Exempt and non-exempt check with the necessities mandated by the Truthful 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 inform you whether or not you’re exempt or non-exempt should you’re unsure.
For those who’re at the moment 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 Time beyond regulation.” Having you as a non-exempt worker would topic the employer to many necessities from the Truthful Labor Requirements Act. An employer needs to seek out each cause to make an worker exempt from these necessities.
Not What You Suppose
The Truthful Labor Requirements Act requires that extra time should be paid not less than 1-1/2 occasions the common hourly wage (“time-and-a-half”). Some state legal guidelines and union contracts require double time in some situations. Some employers voluntarily pay double time for holidays.
Suppose your common hourly charge is $30/hour and also you’re paid $45/hour for extra time. You obtain $450 in gross extra time pay once you work 10 extra time hours in every week. You’ll suppose that “No Tax on Time beyond regulation” means you don’t pay tax on the $450, however that’s not the way it works.
“No Tax on Time beyond regulation” covers solely the pay premium over and above your common hourly charge. The “No Tax” half applies solely to $150 out of the $450 gross extra time pay for 10 hours. You continue to pay taxes as typical on the $300 earned at your common $30/hour charge for these hours.
Consequently, in case your extra time hours are paid time-and-a-half, you’ll haven’t any tax on only one/3 of your gross extra time pay. For those who’re paid double time, you’ll haven’t any tax on 1/2 of the gross extra time pay.
Momentary Window
As is the case with a number of different provisions within the 2025 Trump tax regulation affecting particular person taxpayers, “No Tax on Time beyond regulation” is simply efficient between 2025 and 2028 (inclusive). It expires on the finish of 2028.
Tax Withholding
“No Tax” refers solely to the federal earnings tax. It doesn’t change the Social Safety and Medicare taxes withheld out of your paychecks. It doesn’t scale back your state taxes.
The IRS will make adjustments to payroll tax withholding to deal with extra time pay in a different way, however the adjustments gained’t begin till 2026. You gained’t see any change in your paychecks in 2025 until you alter your tax withholding along with your employer.
Tax Deduction
The IRS will add a field to the W-2 kind for employers to interrupt out the extra time premium. Till then, your employer can report the extra time pay to you exterior the W-2. You’ll have a brand new tax deduction to your extra time pay premium. You’ll use it to reconcile along with your tax withholding. You’ll get the next 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 will not be 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 charge for the extra time hours. In case your common hourly charge is $25/hour, it means you possibly can work 1,000 extra time hours in a 12 months earlier than you hit the cap. That’s like working 60 hours per week each week of the 12 months.
For those who’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 earnings will increase above $150,000 ($300,000 for married submitting collectively). It decreases by $100 for each $1,000 of earnings above the brink. The cap drops to zero when your earnings reaches $275,000 ($550,000 for married submitting collectively).
Most individuals gained’t be affected by the earnings phaseout as a result of each the greenback cap and the phaseout threshold are set sufficiently excessive.
Each Time beyond regulation and Suggestions
“No Tax on Time beyond regulation” and “No Tax on Suggestions” are unbiased of one another. You qualify for each should you obtain each extra time pay and suggestions. For those who’re 65 or older, you additionally qualify for the Senior Deduction. For those who take the usual deduction and also you donate to charities, you qualify for the charity donation deduction, too.
Calculator
I made a calculator that will help you estimate your federal earnings tax earlier than and after “No Tax on Time beyond regulation” and “No Tax on Suggestions.” Use the calculator to see how a lot you’ll profit. Depart the guidelines discipline at 0 should you don’t obtain suggestions. [Email readers: The calculator doesn’t work in emails. Please go to the website to try the calculator.]
For those who’re married submitting collectively, please embody earnings from each of you.
The calculator estimates taxes utilizing fundamental assumptions. It assumes your extra time hours are paid time-and-a-half. Your taxes could also be completely different when you’ve got a extra advanced state of affairs.
***
You’ll discover extra deep dives on latest adjustments from the 2025 Trump tax regulation within the full OBBBA sequence.
Say No To Administration Charges
In case you are paying an advisor a proportion of your belongings, you’re paying 5-10x an excessive amount of. Discover ways to discover an unbiased advisor, pay for recommendation, and solely the recommendation.
