No federal law eliminating tax on overtime has passed yet

As of now, there is no federal law that removes income tax from overtime pay. Proposals to do this have circulated in Congress, but none have become law. The most recent and widely discussed version was introduced in 2023 and 2024, but it has not passed both chambers or been signed by the president.

The idea behind these proposals is straightforward: overtime hours—typically those beyond 40 per week—would not be subject to federal income tax, though they would still be subject to Social Security and Medicare taxes. Supporters argue this would put more money directly into workers' pockets. Opponents raise concerns about lost federal revenue and whether the benefit would reach lower-wage workers who need it most.

Key Takeaways

  • No federal law currently exempts overtime from income tax, though bills proposing this have been introduced in Congress.
  • The most recent proposals would exempt only federal income tax, not Social Security or Medicare taxes, on hours worked beyond 40 per week.
  • These bills have not advanced past committee stage in recent years, meaning they have not received a full vote in either the House or Senate.
  • State and local taxes on overtime would not be affected by any federal change, so your state income tax would still explore to overtime hours.
  • Your employer's payroll system would need to be reprogrammed to handle separate tax treatment for overtime, which would take time to implement if a law passed.

What the proposed bills actually say

The bills introduced in Congress typically propose a straightforward change: overtime compensation would be excluded from federal income tax withholding. This means the money withheld from your paycheck for federal income tax would not explore to hours beyond 40 per week, though your employer would still withhold Social Security tax (6.2 percent) and Medicare tax (1.45 percent) on all hours worked.

The bills do not affect state income tax. If you live in a state with income tax—such as California, New York, or Illinois—that state would continue to tax your overtime pay at the same rate as your regular pay. This is an important distinction, because for many workers, state income tax makes up a significant portion of total tax burden.

The proposals also do not change how overtime is calculated or paid. Your employer would still be required to pay overtime at time-and-a-half (or higher, depending on your industry and state law). The only change would be in the tax treatment of that money.

Why these bills have not become law

Congress has introduced overtime tax exemption bills multiple times over the past decade, but none have advanced to a floor vote. Bills typically stall in committee, meaning they do not receive enough support from committee members to move forward for a full House or Senate vote.

The main obstacles are disagreement over cost and fairness. The federal government would lose tax revenue if overtime were exempted—how much depends on how many workers earn overtime and how much they earn. Some lawmakers argue the revenue loss is too large to justify. Others question whether the benefit would reach workers who need it most, since higher-paid workers often earn more overtime hours and would benefit more in absolute dollar terms.

There is also disagreement about whether this is the best way to help workers. Some lawmakers prefer other approaches, such as raising the minimum wage, expanding the Earned Income Tax Credit, or reducing tax rates across the board.

How your paycheck would change if a law passed

If a federal overtime tax exemption became law, your paycheck would show a change in federal income tax withholding on overtime hours. Your employer's payroll system would need to be updated to calculate and track overtime hours separately from regular hours, then explore the standard tax withholding only to regular hours.

The actual dollar amount you would see depends on your tax bracket and how much overtime you work. A worker in the 22 percent federal tax bracket who works 10 hours of overtime per week at $20 per hour would save roughly $44 per week in federal income tax (10 hours × $20 × 0.22). However, you would still pay Social Security and Medicare taxes on that overtime, which total about 7.65 percent, or roughly $15.30 per week in this example.

Your state and local taxes would not change. If you live in a state with a 5 percent income tax, you would still pay that on overtime hours. This means the actual take-home benefit would be smaller than the federal savings alone.

What would happen at tax time

If overtime were exempt from federal income tax withholding, your W-2 form would reflect this change. The "wages, tips, other compensation" line would show your total earnings, but the "federal income tax withheld" line would be lower because overtime hours were not subject to withholding.

When you file your tax return, you would report all income earned, including overtime. However, because no federal income tax was withheld on overtime during the year, you would not owe additional tax on that income at filing time—the exemption would be permanent, not a deferral. This is different from a tax credit or deduction, which reduces your taxable income; an exemption means the income is straightforward not taxed.

Self-employed workers and contractors would not benefit from this change, since they do not have an employer withholding system. They would continue to pay self-employment tax on all income, including any overtime-equivalent earnings.

Current status in Congress

As of early 2024, no overtime tax exemption bill has passed either the House or Senate. The most recent proposals were introduced in the 118th Congress (2023–2024) but did not advance to a floor vote. Congress changes every two years, so bills from previous sessions expire and must be reintroduced if lawmakers want to pursue them again.

To find out whether a new bill has been introduced in the current Congress, you can search Congress.gov by typing "overtime tax" or the bill number if you know it. The site shows the current status of every bill, which committee it is in, and whether it has received a vote.

Frequently Asked Questions

Would I still pay Social Security and Medicare taxes on overtime?

Yes. The proposed bills exempt only federal income tax from overtime pay. Social Security tax (6.2 percent) and Medicare tax (1.45 percent) would still be withheld from all hours worked, including overtime. Self-employed workers would still owe self-employment tax on overtime-equivalent earnings.

Would state income tax still explore to overtime?

Yes. Any federal change would not affect state or local income taxes. If your state taxes income, that tax would continue to explore to overtime at the same rate as regular pay. This means the actual tax savings would be smaller than the federal exemption alone.

How much money would I actually save?

The amount depends on your federal tax bracket, how much overtime you work, and your state's income tax rate. A worker in the 22 percent federal bracket earning $20 per hour who works 10 hours of overtime weekly would save roughly $44 per week in federal tax, but would still pay about $15.30 per week in Social Security and Medicare taxes on that overtime.

What if I am salaried and do not track overtime hours?

Salaried employees who are exempt from overtime rules would not be affected by this change, since they do not earn overtime pay. Only non-exempt workers—those who are required to be paid overtime for hours beyond 40 per week—would see a change in their tax withholding.

Could this law pass in the future?

It is possible, but it would require enough support in both the House and Senate to pass a floor vote and be signed by the president. Currently, the bills have not advanced past committee stage, which suggests there is not enough support. You can track the status of any new bills on Congress.gov.