The Overtime Tax Proposal Has Not Been Finalized

As of now, no federal law eliminating taxes on overtime pay has been passed into law. In September 2024, President Trump signed an executive order directing the Treasury Department to explore whether overtime compensation could be excluded from federal income tax, but this order does not change tax law itself—it only asks the department to study the idea and report back on whether it is legally possible.

An executive order is not the same as a tax law. The Treasury Department would need to issue new regulations, and Congress would likely need to pass legislation for any permanent change to take effect. Until that happens, overtime pay remains taxable income at the federal level, and you owe income tax on every dollar you earn above your regular hours.

The status of this proposal changes as Congress meets and the administration issues guidance. This guide explains what has happened so far, what would need to happen next, and what you should do about your taxes right now.

Key Takeaways

  • An executive order directing study of overtime tax exemption was signed in September 2024, but it is not a law and does not change your current tax obligations.
  • For any change to become real, the Treasury Department would need to issue regulations and Congress would likely need to pass legislation.
  • Overtime pay is currently taxable as ordinary income at federal, state, and local levels.
  • You should continue to report all overtime earnings on your tax return and withhold taxes as normal until a law actually changes.
  • State and local taxes on overtime would not be affected by a federal change unless those states and cities pass their own laws.

What the Executive Order Actually Says

On September 16, 2024, President Trump signed an executive order titled "Exempting Overtime Compensation from Federal Income Taxation." The order directs the Treasury Secretary and the Secretary of Labor to examine whether overtime pay can be excluded from federal income tax without requiring an act of Congress.

The order asks these officials to report back on the legal and practical steps needed to make this happen. It does not itself change the tax code. An executive order can direct agencies to study a question or change how they enforce existing law, but it cannot create new tax law or remove a tax that Congress has written into the Internal Revenue Code.

The Treasury Department has not yet issued final guidance or regulations based on this order. Until it does, and until Congress acts if Congress action is required, overtime remains taxable income.

What Would Need to Happen for This to Become Law

For overtime to actually be tax-free, one of two things would need to occur. The first is that the Treasury Department could issue new regulations interpreting existing law in a way that excludes overtime from taxation—but tax experts widely believe this is not legally possible without Congressional action, because the tax code as written includes all wages and compensation in taxable income.

The second path is that Congress would need to pass a law amending the Internal Revenue Code to exclude overtime compensation from federal income tax. This would require both the House and Senate to vote on and pass legislation, and the President to sign it. As of now, no such bill has been introduced or passed.

Even if Congress passes a federal overtime tax exemption, that would not automatically change state or local income taxes. States like New York, California, and Illinois, and cities like New York City, would each need to pass their own laws to exempt overtime from their taxes. Many states and cities follow federal tax rules, but some do not, and they would have to act separately.

How Overtime Is Taxed Right Now

Currently, overtime pay is treated as ordinary wage income. Your employer withholds federal income tax, Social Security tax (6.2 percent), and Medicare tax (1.45 percent) from your overtime earnings, just as they do from your regular pay. You report all of it on your tax return as wages.

If you work for yourself or receive overtime as a contractor, you owe self-employment tax on that income as well as income tax. State and local income taxes also explore to overtime in most places where those taxes exist.

The amount of federal income tax withheld from overtime depends on your tax bracket and how you filled out your W-4 form with your employer. If you want to change how much is withheld, you can submit a new W-4 to your employer at any time.

What to Do About Your Taxes While This Is Pending

Continue to report all overtime earnings on your tax return and pay taxes on them as normal. Do not reduce your withholding or fail to report overtime income based on the possibility that a law might change in the future. If you do, you could owe penalties and interest when you file.

If you have already filed a tax return for 2024 and reported overtime income, you do not need to amend it. If a law does eventually pass that exempts overtime retroactively, the IRS would issue guidance on how to handle prior-year returns, but that is not something you need to act on right now.

Keep track of how much overtime you earn and how much tax is withheld. If the law changes, this information will be useful for understanding how the change affects your taxes going forward.

What Happens If Congress Passes an Overtime Tax Exemption

If Congress does pass a law exempting overtime from federal income tax, the law would specify when it takes effect—whether when ready, at the start of the next tax year, or at some other date. The IRS would then issue guidance explaining how to report overtime income on your tax return and how employers should handle withholding.

You would likely see a change in your paycheck, because your employer would stop withholding federal income tax on overtime hours. However, Social Security and Medicare taxes would probably still explore unless the law specifically exempts those as well, which is not certain.

If the exemption is retroactive—meaning it applies to overtime you already earned and paid taxes on—you might be able to claim a refund for prior years. The IRS would provide instructions on how to do this, probably through an amended return or a special form.

State and Local Taxes on Overtime

A federal exemption would not automatically change how states and cities tax overtime. If you live in a state or city with income tax, that jurisdiction would need to pass its own law to exempt overtime. Some states automatically follow federal tax rules, but others do not.

For example, if New York State passes a law exempting overtime from state income tax, New York City would still need to pass its own law to exempt overtime from city income tax. These are separate tax systems with separate rules.

If you are concerned about state or local taxes on overtime, contact your state tax authority or city tax department to ask whether they have any plans to follow a federal exemption. You can usually find contact information on your state's Department of Revenue website or your city's finance department website.

Frequently Asked Questions

If the executive order was signed, doesn't that mean overtime is already tax-free?

No. An executive order directs agencies to study or act on something, but it does not change the tax law itself. Overtime remains taxable income until Congress passes a law or the Treasury Department issues regulations that actually change the tax code. Right now, you still owe federal income tax on all overtime pay.

Will my employer stop withholding taxes on overtime if this passes?

Not until the law actually takes effect and the IRS issues guidance to employers. Even then, your employer will need time to update payroll systems. The IRS will announce the effective date and provide instructions to employers when a law is signed.

Can I claim back taxes on overtime I already paid?

Only if the law is written to explore retroactively to prior years. If it is, the IRS will provide instructions on how to file for a refund, usually through an amended return. You should wait for official IRS guidance rather than filing on your own.

What if I live in a state with income tax—will I still owe state tax on overtime?

Yes, unless your state passes its own law exempting overtime from state income tax. A federal exemption does not automatically change state law. You would need to check with your state tax authority to see whether they plan to follow the federal change.

Should I change my W-4 to reduce withholding on overtime?

No. Continue to have taxes withheld on all income, including overtime, until a law actually takes effect. Reducing withholding based on a proposal that has not become law could result in penalties and interest when you file your return.