The new law provides that individuals earning up to $150,000/year ($300,000/married) will not pay income tax on up to $12,500 ($25,000 married) in overtime (OT) pay. This tax break takes effect this year (2025) and expires at the end of 2028.

Per the new law, overtime pay will be defined by Section 7 of the Fair Labor Standards Act (FLSA). Inclusion of tip income in the calculation of OT pay is specifically prohibited. In addition, the tax exemption is for income tax only—OT compensation will still be subject to payroll (FICA and SECA) taxes.

Prospects: This is a five-year rule—it will expire at the end of 2028, unless Congress changes the law. This sets up a near-certain tax debate within four years, and it could come sooner.

NAIFA Staff Contact: Jayne Fitzgerald – Director – Government Relations, at jfitzgerald@naifa.org