There has been plenty of talk this year about the Working Families Tax Cut (WFTC) and how it affects working families where overtime is common for many people. Whether you work in manufacturing, healthcare, logistics, or public safety, chances are you’ve put in long weeks when duty calls. Naturally, one of the most common questions I’ve heard is: “Do I still have to pay taxes on my overtime?”
The short answer is yes—your overtime pay is still fully taxable. It continues to be taxed at the federal, state, and local levels, and it remains subject to Social Security and Medicare withholdings just like your regular wages. The WFTC did not make overtime tax-free or create a special tax rate for it. However, what it did introduce is a new federal income tax deduction that may reduce the amount of tax you ultimately pay on a portion of that overtime.
This new deduction applies specifically to the premium portion of required overtime pay. Under federal FLSA rules, required overtime applies to hours worked beyond 40 hours in a single week. For example, if you earn $20 per hour and your overtime rate is $30 per hour, only the extra $10 “premium” portion qualifies for the deduction. The base pay—the regular $20 per hour—remains fully taxable.
Not everyone qualifies for the deduction, and several rules apply. To be eligible, you must be a W-2 employee with a valid Social Security number, and you cannot file your taxes using the Married Filing Separately status. The deduction applies only to required overtime. Voluntary overtime—such as picking up holiday shifts or helping on special projects—does not qualify. Only overtime worked beyond the standard 40-hour workweek is eligible.
The deduction itself is capped but still quite helpful for many households. Single filers may deduct up to $12,500, while married couples filing jointly may deduct up to $25,000. These benefits begin to phase out once income reaches certain levels: $150,000 of modified adjusted gross income for single filers and $300,000 for joint filers. As income rises beyond these thresholds, the deduction gradually decreases.
To help make tax preparation easier, employers will begin issuing revised W-2 forms that include a separate listing for the amount of overtime eligible for this deduction. Workers can also reference their 2025 pay stubs to verify their deductible overtime amounts.
So even though overtime remains fully taxable, the WFTC introduces a meaningful opportunity for many to reduce the tax impact of those extra hours. It isn’t tax-free overtime, but it is a valuable deduction that may help lower your total taxable income and reduce your overall tax bill.
The overtime deduction is just one part of the WFTC, and several other provisions may benefit you as well. To stay updated on how these changes could affect your 2025 return, follow along at markcartercpa.com/blog, where I break down new tax rules in clear, practical language.