When Does No Tax on Overtime Start in Texas?

No tax on overtime in Texas is already in effect. President Trump signed the One, Big, Beautiful Bill Act into law on July 4, 2025, and the federal overtime deduction it created applies retroactively to tax years beginning after December 31, 2024. That means it covers all of 2025 through 2028. Because Texas has no state income tax, the federal deduction is the only overtime tax break Texas workers need to think about, and the savings will show up when you file your federal return, not on your weekly paycheck.¹

What the Deduction Actually Covers

The law does not make overtime pay completely tax-free. It creates a federal income tax deduction under 26 U.S.C. § 225 for what the IRS calls “qualified overtime compensation,” and that phrase has a narrow meaning. Only the premium portion of overtime pay qualifies, not the full paycheck for those extra hours.²

Say your regular hourly rate is $30. When you work overtime, your employer pays $45 per hour (time and a half). The premium is the extra $15 above your regular rate. Only that $15-per-hour portion is deductible. The base $30 stays fully taxable, even for overtime hours.³

If your employer pays more than the legally required time and a half, only the portion needed to satisfy the federal overtime requirement counts. Double-time pay produces a deduction equal to half your regular rate per overtime hour, not the full extra amount.³

You do not need to itemize to claim it. The deduction is available whether you itemize or take the standard deduction.⁴

Annual Cap and Income Limits

The deduction tops out at $12,500 per year for single filers and $25,000 for married couples filing jointly. Any overtime premium above the cap is taxed normally.²

Higher earners lose the benefit on a sliding scale. If your modified adjusted gross income is above $150,000 single or $300,000 joint, the deduction shrinks by $100 for every $1,000 over the threshold. A single filer earning $275,000 or more receives no deduction, no matter how much overtime they worked.²

Who Qualifies in Texas

The deduction is limited to overtime required under Section 7 of the Fair Labor Standards Act, which means you must be an FLSA-covered, non-exempt employee. The IRS treats the determination as fact-specific, based on your occupation, work activities, and earnings.³

Under the FLSA, covered non-exempt employees receive at least one and a half times their regular rate for hours worked beyond 40 in a workweek.⁵ Most hourly workers in Texas fit that description. Salaried workers can qualify too if they fall below the FLSA salary threshold and perform non-exempt duties.

Workers Shut Out of the Deduction

Independent contractors and gig workers who receive a 1099 instead of a W-2. The FLSA does not cover you, so no part of your pay counts as qualified overtime compensation.
Exempt salaried employees, typically executives, administrators, professionals, and outside salespeople above the salary threshold. You are not entitled to FLSA overtime, so you cannot claim the deduction.
Workers whose overtime is triggered only by a state daily-overtime rule rather than the FLSA weekly rule. That is rarely a concern in Texas, which follows the federal 40-hour standard, but it matters if you work across state lines.

Why the Federal Deduction Is the Whole Picture Here

Texas does not impose a state personal income tax, and none has ever been enacted.⁶ Federal income tax has always been the only income-based deduction on a Texas worker’s pay stub. Workers in states with their own income tax have to wait and see whether their state will mirror the federal deduction. In Texas, that question doesn’t come up. Whatever you save under the federal rule, you keep.

Payroll Taxes Still Come Out

The deduction reduces federal income tax only. Social Security and Medicare taxes still apply to every dollar of overtime pay, including the premium portion. Employers continue withholding 6.2% for Social Security and 1.45% for Medicare, and workers earning above $200,000 still owe the 0.9% Additional Medicare Tax on the excess.

How You Claim It

Your paycheck will not change. Federal income tax withholding on overtime continues as before, and the benefit arrives as a smaller tax bill or a larger refund when you file your federal return.¹

Starting with the 2026 tax year, employers must report your qualified overtime compensation in Box 12 of your W-2 using the new code “TT.” That figure represents the premium portion only, and you’ll use it to calculate your deduction.⁷

For 2025, which the law covers retroactively, employers may approximate the qualified overtime amount using any reasonable method.⁸ If your 2025 W-2 does not break out overtime separately, you may need to pull your own pay stubs to compute the premium portion yourself. Keep those records.

When the Deduction Ends

This is temporary. The qualified overtime deduction applies only to tax years 2025 through 2028.⁴ Unless Congress extends it, overtime pay returns to being fully taxable at the federal level starting in 2029. Texas workers would still owe no state income tax on overtime, but the federal break would be gone.

1
Internal Revenue Service. One, Big, Beautiful Bill Act – Tax Deductions for Working Americans and Seniors
2
Office of the Law Revision Counsel. 26 USC 225 – Qualified Overtime Compensation
3
Internal Revenue Service. Questions and Answers About the New Deduction for Qualified Overtime Compensation
4
Internal Revenue Service. Treasury, IRS Provide Guidance for Individuals Who Received Tips or Overtime During Tax Year 2025
5
U.S. Department of Labor. Overtime Pay
6
State of Texas. Texas Constitution Article 8 – Taxation and Revenue
7
Internal Revenue Service. 2026 General Instructions for Forms W-2 and W-3
8
Congress.gov. H.R. 1 – 119th Congress (2025-2026) – Text