The earlier put up coated “No Tax on Suggestions” within the new 2025 Trump tax regulation. The identical regulation additionally has a brand new “No Tax on Extra time” provision. Let’s look into it. When you earn each suggestions and additional time pay, you possibly can profit from each!
Non-Exempt W-2 Staff
Generally, solely W-2 workers are entitled to additional time pay. Unbiased contractors paid by a 1099 don’t qualify for additional time. Nor do self-employed enterprise homeowners.
Amongst W-2 workers, for essentially the most half, solely hourly (“non-exempt”) workers are entitled to additional time pay. Most salaried (“exempt”) workers don’t obtain additional time pay, whatever the variety of hours they work in per week.
Some salaried workers aren’t paid excessive sufficient to qualify as exempt workers. They’re nonetheless categorised as non-exempt and entitled to additional time pay.
Exempt and non-exempt check with the necessities mandated by the Honest Labor Requirements Act of 1938. Being exempt signifies that the employer isn’t required to comply with these necessities in its employment relationship with you. Your employer will inform you whether or not you’re exempt or non-exempt in case you’re unsure.
When you’re at present a salaried exempt worker, it’s unlikely that your employer is prepared to re-classify you as non-exempt and provide the benefit of “No Tax on Extra time.” Having you as a non-exempt worker would topic the employer to many necessities from the Honest Labor Requirements Act. An employer needs to seek out each cause to make an worker exempt from these necessities.
Not What You Suppose
The Honest Labor Requirements Act requires that additional time should be paid a minimum of 1-1/2 occasions the common hourly wage (“time-and-a-half”). Some state legal guidelines and union contracts require double time in some eventualities. Some employers voluntarily pay double time for holidays.
Suppose your common hourly charge is $30/hour and also you’re paid $45/hour for additional time. You obtain $450 in gross additional time pay if you work 10 additional time hours in per week. You’ll suppose that “No Tax on Extra time” means you don’t pay tax on the $450, however that’s not the way it works.
“No Tax on Extra time” covers solely the pay premium over and above your common hourly charge. The “No Tax” half applies solely to $150 out of the $450 gross additional time pay for 10 hours. You continue to pay taxes as normal on the $300 earned at your common $30/hour charge for these hours.
Because of this, in case your additional time hours are paid time-and-a-half, you’ll don’t have any tax on just one/3 of your gross additional time pay. When you’re paid double time, you’ll don’t have any tax on 1/2 of the gross additional time pay.
Momentary Window
As is the case with a number of different provisions within the 2025 Trump tax regulation affecting particular person taxpayers, “No Tax on Extra time” is barely efficient between 2025 and 2028 (inclusive). It expires on the finish of 2028.
Tax Withholding
“No Tax” refers solely to the federal earnings tax. It doesn’t change the Social Safety and Medicare taxes withheld out of your paychecks. It doesn’t scale back your state taxes.
The IRS will make adjustments to payroll tax withholding to deal with additional time pay in a different way, however the adjustments received’t begin till 2026. You received’t see any change in your paychecks in 2025 except you modify your tax withholding along with your employer.
Tax Deduction
The IRS will add a field to the W-2 type for employers to interrupt out the additional time premium. Till then, your employer can report the additional time pay to you exterior the W-2. You’ll have a brand new tax deduction in your additional time pay premium. You’ll use it to reconcile along with your tax withholding. You’ll get a better tax refund if the tax withholding was too excessive.
This deduction is on the market whether or not you are taking the usual deduction or itemize your deductions. Nevertheless, it doesn’t decrease your AGI. 100% of your additional time pay will nonetheless be included in your AGI. It doesn’t make it simpler so that you can qualify for different tax advantages, such because the Little one Tax Credit score.
Greenback Cap
You might not be allowed to deduct all of your additional time pay premiums. There’s a $12,500 cap ($25,000 for married submitting collectively). You don’t get this tax deduction in case you’re married submitting individually.
As a result of most individuals are paid time-and-a-half for additional time, a $12,500 cap for the premium portion of the additional time pay interprets into $25,000 on the common hourly charge for the additional time hours. In case your common hourly charge is $25/hour, it means you possibly can work 1,000 additional time hours in a yr earlier than you hit the cap. That’s like working 60 hours per week each week of the yr.
When you’re married submitting collectively, and solely certainly one of you has additional time pay, your cap is twice as excessive as that for a single individual.
Earnings Phaseout
The greenback cap drops slowly as your earnings will increase above $150,000 ($300,000 for married submitting collectively). It decreases by $100 for each $1,000 of earnings above the brink. The cap drops to zero when your earnings reaches $275,000 ($550,000 for married submitting collectively).
Most individuals received’t be affected by the earnings phaseout as a result of each the greenback cap and the phaseout threshold are set sufficiently excessive.
Each Extra time and Suggestions
“No Tax on Extra time” and “No Tax on Suggestions” are impartial of one another. You qualify for each in case you obtain each additional time pay and suggestions. When you’re 65 or older, you additionally qualify for the Senior Deduction. When you take the usual deduction and also you donate to charities, you qualify for the charity donation deductiontoo.
Calculator
I made a calculator that can assist you estimate your federal earnings tax earlier than and after “No Tax on Extra time” and “No Tax on Suggestions.” Use the calculator to see how a lot you’ll profit. Go away the guidelines subject at 0 in case you don’t obtain suggestions. (E mail readers: The calculator doesn’t work in emails. Please go to the web site to attempt the calculator.)
When you’re married submitting collectively, please embrace earnings from each of you.
The calculator estimates taxes utilizing primary assumptions. It assumes your additional time hours are paid time-and-a-half. Your taxes could also be totally different in case you have a extra advanced state of affairs.
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You’ll discover extra deep dives on current adjustments from the 2025 Trump tax regulation within the full OBBBA sequence.
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