No Tax on Overtime Act

Bill Number

H.R. 3118

Origin Chamber

House

Congress

119th Congress, Session 1

Policy Area

Taxation

Status

Introduced

Latest Action

2025-04-30: Referred to the House Committee on Ways and Means.

Last Updated

2025-05-28T20:03:38Z

AI-Generated Summary

Purpose

The "No Tax on Overtime Act" (H.R. 3118) aims to provide tax relief to workers by allowing them to deduct qualified overtime pay from their taxable income. This effectively makes a portion of overtime compensation tax-free, encouraging additional work hours while targeting benefits toward lower- and middle-income earners.

Key Provisions

• Deduction for Overtime Pay: Taxpayers can deduct the amount of "qualified overtime compensation" received during the tax year. Qualified overtime is defined as pay required under the Fair Labor Standards Act (FLSA) of 1938 for hours worked beyond the regular rate (typically time-and-a-half for hours over 40 per week).
• Hourly Limit: The deduction is capped at overtime pay for up to 300 hours of service per year. For joint tax returns, this limit applies separately to each spouse.
• Income Phaseout: The deduction reduces by $100 for every $1,000 that a taxpayer's modified adjusted gross income (MAGI) exceeds $100,000 (or $200,000 for joint returns). MAGI is adjusted gross income plus certain exclusions (e.g., foreign earned income).
• Reporting Requirements: Taxpayers must include the recipient's Social Security number (SSN) on their tax return to claim the deduction. Employers must report the total qualified overtime on Form W-2. Omitting a correct SSN is treated as a mathematical or clerical error, allowing the IRS to assess taxes without full notice.
• Availability to All Filers: The deduction is available even to those taking the standard deduction (non-itemizers).
• Implementation: The U.S. Treasury Secretary must update withholding tables and procedures to account for this deduction.
• Effective Date: Applies to tax years beginning after December 31, 2024.

Significant Changes to Existing Law

• Adds a new Section 224 to the Internal Revenue Code (IRC) for the overtime deduction, redesignating the existing Section 224 (on health savings accounts) to Section 225.
• Expands the standard deduction under IRC Section 63(b) to include this new deduction alongside others like educator expenses.
• Amends IRC Section 6051 to require overtime reporting on W-2 forms, similar to other wage details.
• Updates IRC Section 6213(g) to treat SSN omissions for this deduction as correctable errors, streamlining IRS enforcement.
• These changes integrate the deduction into the existing tax framework without altering core FLSA overtime rules.

Potential Impacts

• On Workers: Reduces federal income tax liability for eligible overtime earners, potentially increasing take-home pay by up to the full amount of overtime for 300 hours (e.g., for someone earning $20/hour regular rate, this could mean deducting up to about $9,000 in overtime pay). Benefits are phased out for higher earners, focusing relief on those under the income thresholds.
• On Employers: Increases administrative burden due to new W-2 reporting requirements, but may encourage hiring or overtime scheduling to retain workers.
• On Government Agencies: The IRS faces implementation costs for updated forms, withholding tables, and enforcement (e.g., SSN verification). This could lead to reduced federal tax revenue, estimated in billions annually depending on overtime trends, potentially affecting budget allocations.
• On Citizens Broadly: May boost workforce participation and economic activity by making overtime more financially attractive, but higher-income households see limited or no benefit.
• International Relations: Minimal direct impact, though it could indirectly affect U.S. competitiveness by supporting domestic labor costs.

Main Stakeholders

• Hourly Workers: Primarily non-exempt employees under FLSA (e.g., in manufacturing, retail, or service industries) who regularly work overtime; benefits are most significant for those earning under $100,000 MAGI.
• Employers: Businesses required to track and report overtime, potentially gaining from motivated staff but facing compliance costs.
• IRS and Treasury Department: Responsible for enforcement, revenue collection adjustments, and procedural updates.
• Taxpayers Filing Joint Returns: Couples where both spouses work overtime can claim separate deductions, amplifying benefits for dual-income households.
• Higher-Income Earners: Indirectly affected by the phaseout, which limits access and may shift tax burdens elsewhere in the code.

Notable Legal, Constitutional, or Political Implications

• Legal: Reinforces FLSA overtime rules by tying the deduction to compliant pay, potentially increasing scrutiny on wage violations. The SSN requirement enhances anti-fraud measures but raises privacy concerns under existing tax laws. No major challenges anticipated, as it fits within Congress's broad taxing authority.
• Constitutional: Aligns with the 16th Amendment's grant of federal income tax power; the deduction is a permissible incentive, not a direct subsidy, avoiding equal protection issues despite income-based phaseouts (which are common in tax policy).
• Political: Represents a pro-labor tax cut, potentially appealing to working-class voters, but could spark debates on tax equity (e.g., favoring overtime workers over salaried ones) or revenue loss amid fiscal pressures. As an amendment to the IRC, it requires House Ways and Means Committee approval and could influence broader tax reform discussions.

This summary was generated by AI and may contain inaccuracies. Refer to the official source document for the authoritative text.

Sponsor

Rep. Moran, Nathaniel [R-TX-1]

Recent Actions

• 2025-04-30: Referred to the House Committee on Ways and Means.
• 2025-04-30: Introduced in House
• 2025-04-30: Introduced in House

Bill Versions

• No Tax on Overtime Act — issued 2025-04-30 — PDF (5 pages)