The House-passed reconciliation budget bill, H.R.1, contains a provision that would make certain overtime (OT) pay free from income tax, but not from payroll (Social Security/Medicare) taxes. This tax relief provision is limited both by income and by the Fair Labor Standards Act’s (FLSA’s) definition of qualified overtime hours.
The rule, if enacted into law, would benefit nonexempt employees (as defined by the FLSA) who work more than 40 hours a week. Further, only those employees who earn less than $160,000 in a year would be eligible for the OT income tax exemption.
The OT deduction is not permanent—the House bill provision would expire at the end of 2028.
Senate-side, a proposal by a Republican tax-writer, Sen. Roger Marshall (R-KS) would allow individuals to deduct up to $10,000 in overtime pay ($20,000 for married couples). The deduction would phase out when income grows to more than $100,000 (single) or $200,000 (married).
Prospects: The proposal to make OT pay income tax free came from President Trump and is one of his top priorities for this bill. Consequently, Washington insiders believe that the Senate will include an OT provision in its version of the budget reconciliation bill. The Senate provision may even mirror the House provision, although it is also possible that Senators will modify the House provision to look more like Sen. Marshall’s proposal, or perhaps further limit it in an effort to reduce its cost.
NAIFA Staff Contact: Jayne Fitzgerald – Director – Government Relations, at jfitzgerald@naifa.org