No Tax on Overtime: How It Could Change Your Paycheck

 

Introduction

Imagine working overtime and keeping every extra dollar you earn without paying taxes on it. Sounds like a dream, right? Well, it might become a reality soon. The idea of eliminating taxes on overtime pay is gaining traction in the U.S., with lawmakers pushing for policies that would allow employees to take home more of their hard-earned money. But what does this mean for workers, businesses, and the economy? Let’s dive in.

The Push for No Tax on Overtime

In early 2025, U.S. Representative Russ Fulcher reintroduced the Keep Every Extra Penny (KEEP) Act, aiming to remove income taxes on overtime pay. This proposal aligns with former President Donald Trump’s campaign promise to end all taxes on overtime earnings. The goal? To help American workers earn more, encourage workforce participation, and ease financial burdens caused by inflation 【18】.

How Would It Work?

Under the proposed legislation, only income taxes would be removed from overtime pay—not payroll taxes. This means that Social Security, Medicare, and unemployment insurance would continue receiving funding, preventing disruptions in these essential programs 【18】.

Potential Benefits of Tax-Free Overtime

✅ More Money in Your Pocket

If you’re an hourly worker clocking in extra hours, this law could significantly boost your take-home pay. For example, if you currently earn $25 per hour and work 10 hours of overtime, that extra $250 could be tax-free—potentially saving you hundreds or even thousands per year.

✅ Encourages Hard Work & Workforce Growth

With no taxes on overtime, more employees might be willing to put in extra hours, helping businesses meet demand without hiring additional staff. This could also attract more people into the workforce, addressing ongoing labor shortages 【18】.

✅ Increased Spending Power

With workers keeping more of their earnings, consumer spending could rise, giving a boost to local businesses and the economy as a whole.

Possible Challenges & Criticisms

⚠️ Impact on Government Revenue

One major concern is the potential loss of tax revenue. The Tax Foundation estimates that exempting all overtime pay from income tax could cost the federal government around $680 billion over ten years. If payroll taxes were also removed, the loss could exceed $1.5 trillion 【17】.

⚠️ Employer Reactions

While some businesses might welcome the increased availability of overtime workers, others may struggle with higher payroll costs. Companies could also become more cautious about approving overtime to control expenses.

⚠️ Fairness for Salaried Employees

The law primarily benefits hourly workers eligible for overtime pay under the Fair Labor Standards Act (FLSA). Salaried employees who work beyond 40 hours a week but don’t qualify for overtime wouldn’t see any tax advantages, potentially creating disparities in the workplace 【17】.

Is This Law Likely to Pass?

With Republican control of the House, Senate, and White House, the KEEP Act has a stronger chance of becoming law than in previous years. Trump has emphasized his commitment to eliminating overtime taxes, suggesting that this could be a major policy move in the near future 【18】. However, there will likely be debates over how to offset the revenue loss and ensure fairness across different worker classifications.

Conclusion

The idea of tax-free overtime is exciting for many workers who rely on extra hours to make ends meet. If passed, it could provide financial relief, encourage workforce participation, and stimulate economic growth. However, concerns about government revenue loss and employer adjustments remain. As the debate continues, employees and businesses alike should stay informed on how this potential policy could impact them.

Would you support tax-free overtime? Let us know in the comments!