No Tax on Overtime

The concept of No Tax on Overtime has recently gained popularity among workers, businesses, and taxation experts. With rising living costs and increased reliance on overtime pay, workers have been asking a central question: Could overtime payments finally be made exempt from taxes?

In this article, we will break down what No Tax on Overtime is all about, the current status of the no tax on overtime bill, if it has been passed or not, and, more importantly, if approved, when does no tax on overtime start?

What Does No Tax on Overtime Mean?

No tax on overtime refers to a proposed change to the federal tax code to make overtime pay exempt from federal income tax. The suggested change states that:

• Regular wages would still be subject to taxation.
• The overtime compensation received will not be subject to federal income tax.
• Social Security taxes, also known as payroll taxes, may also be due

The aim is to encourage employees to retain a significant portion of their cash payments for extra working hours, rather than losing them all to taxes.

How Overtime Is Taxed Under Current Law?

Before checking whether the no tax on overtime bill came into law, a person should know what rules already exist about overtime.

• Overtime pay is taxed in just about the same way as regular wages.
• It is subject to taxation for Federal Income Tax, Social Security Tax, Medicare Tax, and State Tax.
• Overtime seems to be heavily taxed because more is being withheld when more is paid to an employee.

Actually, overtime pay is not taxed at a higher rate, though there can be withholding issues.

Why the No Tax on Overtime Proposal Matter?

The push for no tax on overtime has gained momentum for several reasons:

Rising Cost of Living

Many workers rely on overtime to cover basic expenses such as rent, groceries, and healthcare. Tax-free overtime would provide immediate financial relief.

Labor Shortages

Industries such as healthcare, construction, logistics, and manufacturing depend heavily on overtime. Eliminating tax on overtime could encourage employees to take additional shifts.

Support for Middle- and Lower-Income Workers

Overtime is most common among hourly workers. Removing federal income tax on overtime wages would disproportionately benefit those who need it most.

The No Tax on Overtime Bill: Current Status

Many individuals inquire, “Did the no-tax on overtime pass? Overtime compensation is still fully taxable under current IRS regulations. The statement about the no tax on overtime bill passed is not correct at the current time.

Did No Tax on Overtime Pass?

To be clear and accurate, No Tax on Overtime has not passed into law.

• Did no tax on overtime pass? No.
• Has no tax on overtime passed yet? Not at this time.
• Was the no-tax-on-overtime bill passed? It is still pending and remains a proposal.

Any change to its tax treatment would need to be enacted through formal legislation by Congress. Until then, any extra pay that comes to an employee as a result of working overtime is fully eligible for taxation.

When Does No Tax on Overtime Start?

At this time, there is no official start date for no tax on overtime because the policy has not been passed into law. If approved in the future, it would apply to a specific tax year going forward, not retroactively. The IRS would then release guidance explaining when no tax on overtime starts and how payroll and withholding should be handled.

How Much Could Workers Save If Overtime Becomes Tax-Free?

Let’s look at a realistic example:

• Hourly rate: $30
• Overtime rate: $45
• Overtime hours per week: 8
• Annual overtime pay: ~$18,700

If no tax on overtime becomes law and the worker is in the 22% tax bracket, this could mean over $4,000 per year in tax savings.

That extra income could be used for household expenses, debt reduction, emergency savings, and retirement contributions.

Would Payroll Taxes Still Apply?

Yes. The proposed plans are mainly focused on the federal income tax. Payroll tax will continue to apply. The Social Security tax, which stands at 6.2%, and the Medicare tax, which stands at 1.45%, will continue to be deducted, and the employer will continue to contribute their part.

What Employers Should Prepare For?

If there is no tax on overtime, employers would have to compensate employees for the following:

• Payroll systems and software
• Wage classifications for overtime
• W-2 reporting
• Withholding calculations

The separation between regular salary and overtime salary will be imperative to avoid IRS compliance problems.

Final Thoughts

‘No tax on overtime’ is part of the move towards making the tax system up-to-date and helping working Americans. Although the “no tax on overtime” bill headlines are being shared on the internet, they are misleading.

Until the law is passed, overtime benefits will continue to remain taxable. The most prudent way to prepare for changes that may arise in the future is to stay updated and make use of a tax expert. Read for more guidelines.