No Tax on Overtime: Why So Many Refunds Are Bigger This Year

This tax season has been a pleasant surprise 😊

For the last couple of years, many of my clients told me the same story: income was down because overtime had dried up. So seeing how much of a difference the new “no tax on overtime” rule has made this year has been genuinely encouraging—especially for people who rely on overtime to make ends meet.

That said, there is still a lot of confusion about what “no tax on overtime” actually means. Let’s clear it up.

What “No Tax on Overtime” Really Means ⚠️

The phrase is a little misleading.

When you earn overtime, you’re usually paid either time-and-a-half or double time. Under the current rule:

• Only the premium portion is not taxed

• Your regular (straight-time) pay is still taxed

Example 💡

If you earn $20 per hour and are paid time-and-a-half for overtime:

• $20 = regular pay (still taxable)

• $10 = overtime premium (not taxed)

It’s that extra $10 that gets excluded from tax—not the entire overtime paycheck.

Why Your W-2 Matters More Than Ever 📄

One of the biggest issues we’ve seen this year is inconsistent reporting by employers.

Some employers clearly list the overtime premium on the W-2. Others do not.

• Check Box 14 on your W-2 (this is the most common place)

• Some payroll providers (like ADP) include a separate breakdown as part the W-2. Occasionally, they will put the overtime information there.

If it is not listed, the responsibility falls on you to provide the number.

Best backup plan if your W-2 does not show it clearly 🧾

• Look at your last 2025 pay stub

• Check the year-to-date overtime payment. Make sure that you know how much of that is time and a half and how much is something else. Like double time.

• In rare cases, you may need to dig deeper into payroll records

I had one client this year whose total overtime wages were $33,330, all at time-and-a-half. That meant the untaxed premium portion was $11,110.

At a 22% tax rate, that alone made a four-figure ($2442) difference on his return 💰.

The $12,500 Cap (Usually is Not a Problem) 📊

There is a limit:

• Each individual is capped at $12,500 per year of overtime premium

• Married couples can each claim up to $12,500 individually

In practice, most overtime workers never hit this cap. Ironically, if you do hit it, that means you earned a lot of overtime which is not exactly a bad problem to have.

Income Phase-Outs (Rarely an Issue) 📉

There is also a phase-out, but it affects very few overtime workers:

• Single filers: phase-out starts at $150,000 and ends at $275,000

• Married filing jointly: phase-out starts at $300,000 and ends at $550,000

Even a married couple earning $500,000 will still receive some benefit. The phase-out is slow and gradual.

Why Refunds Are So Big in 2025 💵

Here is an important wrinkle:

The law changed in 2025
Withholding tables did not

That means employers withheld tax on overtime premiums, even though those premiums were ultimately not taxable. As a result:

• Refunds this year were often much larger

• Overtime also tends to be over-withheld due to how payroll tax tables work

Payroll systems assume that a big overtime paycheck reflects your normal income, pushing you into a higher bracket for withholding purposes. At tax time, everything settles back to reality and the excess comes back as a refund.

What Changes Next Year 🔄

Next year, withholding should adjust.

That means:

• Less tax taken out during the year

• Smaller refunds

• More money in your regular paychecks

It may not feel as exciting at tax time but financially, it is still a win.

Less to the government. More for you.

One Last (Important) Tip 📌

If you worked overtime last year and do not see it clearly listed on your W-2, come prepared:

• Bring pay stubs

• Bring payroll summaries

• Or at least know the overtime premium number

That allows me to enter it directly into the software and get your return efiled accurately and quickly.

I am looking forward to seeing many of you and yes, this has been a particularly fun tax season 😊.

Questions? Need help with your return? 🤝

Reach out before filing. A little preparation can make a big difference.

📞 Call us at 978-459-8359 or ✍️ write to us — we’re happy to help.