A proposed tax break could give overtime workers a bigger refund next year—but not a bigger paycheck today.
The Overtime Pay Tax Relief Act of 2025 (H.R.561) would allow employees to deduct part of their overtime wages from their taxable income. While this could lower what many workers owe the IRS, the taxes would still come out of your paycheck as usual. You’d only see the savings when you file your return.
What is the Overtime Pay Tax Relief Act?
Sponsored by Rep. Don Bacon (R-NE), the bill aims to ease the tax burden for Americans who work extra hours. The legislation is now in the hands of the House Ways and Means Committee.
If enacted, the law would amend the Internal Revenue Code to create a new deduction for overtime compensation starting in 2025.
How the deduction would work
Eligible workers would be able to:
- Deduct up to 20% of their overtime income from their federal taxable income
- Claim the deduction even if they don’t itemize
- Use the deduction through December 31, 2029
To qualify, the overtime must be paid under the Fair Labor Standards Act (FLSA) and the worker’s adjusted gross income (AGI) must be:
- $100,000 or less for individuals
- $150,000 or less for heads of household
- $200,000 or less for joint filers
You’ll still pay taxes upfront
While the bill offers real tax savings, it doesn’t change withholding rules. That means your employer will continue to withhold taxes from your overtime wages throughout the year. You’ll only receive the benefit when you file your taxes and claim the deduction.
The Treasury Department may adjust withholding tables in the future if the bill becomes law, but that’s not guaranteed.
Who benefits the most?
This legislation would primarily benefit middle-income workers who regularly rely on overtime pay, such as:
- Nurses and hospital staff
- First responders
- Factory and warehouse employees
- Utility workers
- Transportation and logistics professionals
By reducing taxable income, the bill could lower their tax bill or increase their refund—without changing their base pay.
Why this matters
Currently, all wages—including overtime—are taxed at full federal rates. Many workers find themselves in a higher bracket after taking on extra shifts, which reduces the incentive to work more.
Supporters say H.R.561 would reward hard work without raising wages artificially. Opponents may argue the deduction disproportionately helps those earning near the AGI cutoff and complicates the tax code.
What’s next for the bill?
The Overtime Pay Tax Relief Act has not yet gained cosponsors, but it may become part of larger tax reform negotiations later in 2025. It would need to pass the House and Senate and be signed by the president to become law.
Bottom line
H.R.561 could offer a valuable deduction for workers who log overtime hours—but it won’t show up in your paycheck right away. If passed, it could make a difference at tax time in 2026.
Josh is the Vice President of FingerLakes1.com. Have a question? Send them to [email protected].