No Tax on Overtime for All Workers Act

Bill Number: H.R. 4740
Origin Chamber: House
Congress: 119th Congress, Session 1
Policy Area: Taxation
Status: Introduced
Latest Action: 2025-07-23: Referred to the House Committee on Ways and Means.
Last Updated: 2026-01-14T09:07:15Z

AI-Generated Summary

Purpose

The "No Tax on Overtime for All Workers Act" (H.R. 4740) aims to provide tax relief to workers by allowing them to deduct certain overtime pay from their taxable income. This effectively reduces or eliminates federal income taxes on qualifying overtime compensation, encouraging additional work hours while increasing workers' take-home pay.

Key Provisions

Definition of Qualified Overtime Compensation: The bill amends Section 225(c)(1) of the Internal Revenue Code (IRC) to define "qualified overtime compensation" in two ways:
Overtime pay required under Section 7 of the Fair Labor Standards Act (FLSA) of 1938, which is compensation paid at a rate higher than an employee's regular wage for hours worked beyond the standard (typically over 40 hours per week).
Other overtime pay that exceeds the regular rate, paid at least 1.5 times the regular rate, for hours beyond a standard work period (at least 40 hours in a 7-day period), as required by a collective bargaining agreement (a contract between unions and employers) or a pre-existing agreement between employer and employee.
Deduction Allowance: Workers can deduct this qualified overtime pay when calculating their federal income taxes.
Effective Date: Applies to tax years beginning after December 31, 2024, meaning it would first impact 2025 taxes filed in 2026.

Significant Changes to Existing Law

Prior to this amendment, IRC Section 225 allowed deductions for some overtime but with a narrower definition limited to FLSA-mandated overtime. The bill expands this to include overtime defined by collective bargaining agreements or individual employment contracts, as long as it meets the specified criteria (e.g., 1.5x rate and minimum 40-hour standard).
This broadens eligibility beyond just non-exempt (hourly) workers under federal labor law to potentially include more unionized or contracted workers, without altering the underlying wage requirements.

Potential Impacts

On Workers: Increases net income from overtime by reducing federal income tax liability, potentially incentivizing more overtime work and improving financial incentives for lower- and middle-income earners who rely on extra hours.
On Employers: May encourage hiring practices that utilize overtime rather than new staff, as workers retain more of their earnings; however, it does not change wage payment obligations under labor laws.
On Government Agencies: The Internal Revenue Service (IRS) would process additional deductions, potentially complicating tax filings and audits. The U.S. Department of the Treasury could see reduced federal revenue (estimated billions annually, depending on overtime usage), affecting budget allocations for programs like Social Security or infrastructure.
On International Relations: Minimal direct impact, though it could indirectly influence U.S. labor competitiveness by making overtime more attractive compared to other countries' tax systems.

Main Stakeholders Affected

Workers: Primarily hourly, unionized, or contract-based employees who work overtime, especially in industries like manufacturing, healthcare, transportation, and retail.
Employers: Businesses required to pay overtime under FLSA or agreements, including small businesses and large corporations, who may adjust scheduling or compensation strategies.
Government Entities: IRS for tax administration; Congress and Treasury for revenue and policy oversight.
Unions and Labor Groups: Benefit from expanded protections for negotiated overtime, potentially strengthening collective bargaining.

Notable Legal, Constitutional, or Political Implications

Legal: Aligns with existing FLSA requirements without overriding them, but introduces new IRS guidance needs for verifying "qualified" overtime (e.g., documenting agreements). Could lead to litigation if deductions are disputed, such as over what constitutes a valid pre-work agreement.
Constitutional: No apparent conflicts; tax deductions are a standard congressional power under Article I, Section 8 of the U.S. Constitution, which allows Congress to lay and collect taxes.
Political: Represents a pro-labor tax policy shift, potentially appealing to working-class voters by addressing wage stagnation, but may face opposition over revenue loss. As an amendment to the tax code, it could influence broader debates on tax fairness and incentives for work.

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

Sponsor

Rep. Sykes, Emilia Strong [D-OH-13]

Cosponsors (1)

Rep. Walkinshaw, James R. [D-VA-11]

Recent Actions

2025-07-23: Referred to the House Committee on Ways and Means.
2025-07-23: Introduced in House
2025-07-23: Introduced in House

Bill Versions

No Tax on Overtime for All Workers Act — issued 2025-07-23 — PDF (3 pages)