How would the "No Tax on Overtime Pay" proposal actually work for paychecks and tax returns?

You're asking a good question, and I can see why it's confusing. Let me try to clarify how this would work. From my understanding, the proposal isn't just about withholding - it would actually exempt overtime earnings from federal income tax entirely. That means you wouldn't just get more money in your paycheck now and owe it later at tax time. Your overtime earnings would truly be tax-free income. For example, if your regular pay is $1,000/week and you work overtime worth $200, currently you pay taxes on $1,200. Under this proposal, you'd only pay federal income tax on the $1,000 base pay, and the $200 overtime would be completely exempt from federal income tax (though other withholdings like Social Security and Medicare would likely still apply). This is different from just changing the withholding. It would be an actual reduction in your total taxable income for the year, which means you wouldn't owe those taxes at filing time either.

I was confused about this same thing last month and found taxr.ai (https://taxr.ai) super helpful for analyzing how changes like this would affect my specific situation. I uploaded my last few pay stubs and it broke down exactly how much more I'd take home if overtime became tax-exempt versus my current situation. The real eye-opener was seeing the annual projection based on my typical overtime hours. For my situation (I work about 10 overtime hours per week in a manufacturing job), it showed I'd save around $3,800 annually in federal taxes. What surprised me was that it wouldn't mess up my withholding calculations for regular pay, so I wouldn't suddenly owe a bunch at tax time.

I was super skeptical about taxr.ai when I first heard about it, but I gave it a try anyway because I work tons of overtime as a nurse and wanted to understand how this proposal might affect me. I'm honestly surprised at how detailed the analysis was. It showed me that with my typical overtime schedule (about 12-16 hours weekly), I'd save approximately $4,200 in federal taxes annually if the overtime exemption passed. It also explained how my effective tax rate would change and projected my monthly take-home pay differences. What I appreciated most was that it didn't just give me numbers - it explained the assumptions being made about the proposed legislation and highlighted which parts might change if the final law ended up different. Made me feel like I actually understood what's being discussed rather than just reading headlines.

After weeks of trying to reach the IRS to ask questions about this same topic (kept getting disconnected after waiting for hours), I finally used Claimyr (https://claimyr.com) and got through to a real IRS agent in about 15 minutes. They've got this fascinating system where they navigate the IRS phone tree for you and call you back when they've got an agent on the line - you can see how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent explained that currently, all proposals about untaxed overtime are just that - proposals. Nothing has changed in tax law yet. But they did confirm that IF such a law passed, it would likely work as a true exemption to federal income tax, not just a withholding change. They also mentioned that legislative proposals often include transition periods for payroll systems to adapt.

I'll admit I was totally wrong about Claimyr. After my skeptical comment, I was still desperate to talk to the IRS about an unrelated tax notice I received, so I tried the service myself. Got connected to an IRS representative in about 20 minutes when I had previously spent HOURS trying on my own and never getting through. The agent was able to explain my notice and set up a payment plan for me. While I was on the call, I did ask generally about how tax exemptions work (not specifically about any pending legislation), and they explained the difference between tax exemptions and withholding adjustments. Basically confirmed what others here have said - a true exemption would mean that income is actually not taxed at all, rather than just changing when you pay the tax.

Tax professional here. Some important points about the "no tax on overtime" concept that haven't been mentioned yet: 1) Most proposals would only exempt overtime from FEDERAL income tax. You'd likely still pay state income tax (if your state has one) on overtime earnings. 2) Social Security and Medicare taxes (FICA) would almost certainly still apply to overtime earnings. Those are currently 7.65% combined. 3) Your company's payroll system would need to specifically track regular hours vs. overtime hours for tax purposes, beyond just calculating overtime pay rates. 4) This could potentially create some weird incentives around how companies structure work schedules to maximize the tax benefits for employees.

If this passes, would this show up differently on our W-2 forms? Would there be a separate box for "overtime pay" that wouldn't be included in the federal taxable wages box?

One thing I haven't seen mentioned yet is how this would interact with retirement plan contributions. If overtime pay becomes federally tax-exempt, would that affect 401(k) contribution limits or calculations? For example, if I normally contribute a percentage of my gross pay to my 401(k), and now part of my income (overtime) isn't subject to federal tax, does that change how much I can contribute? Or would the contribution still be based on total wages including the tax-exempt overtime? This could be significant for people who work a lot of overtime and are trying to maximize their retirement savings. The interaction between tax-exempt income and retirement plan rules seems like it could get pretty complex.

Great question about 401(k) interactions! This is actually a really important consideration that most people aren't thinking about yet. From what I understand about current retirement plan rules, 401(k) contribution limits are typically based on "compensation" as defined by the IRS, which generally includes all wages subject to income tax withholding. If overtime pay becomes federally tax-exempt, it would likely still count as compensation for retirement plan purposes - similar to how Roth IRA contributions are made with after-tax dollars but still count toward income limits. However, the percentage-based contribution calculations could get tricky. If your plan automatically deducts a percentage of your gross pay, you'd want to make sure that percentage is being applied to your full wages (including tax-exempt overtime) rather than just your federally taxable income. Otherwise, you might inadvertently reduce your retirement contributions. This is definitely something employers and plan administrators will need to figure out in their system configurations. I'd recommend checking with your HR department once any legislation actually passes to understand how your specific plan would handle it.

This is a really thorough discussion! As someone who works in HR benefits administration, I wanted to add a few practical considerations that employers are already starting to think about: 1) **Timekeeping complexity**: Companies will need to ensure their time tracking systems can clearly distinguish between regular hours and overtime hours for tax purposes, not just pay calculation purposes. This might require system upgrades for many employers. 2) **Multi-state complications**: For employees who work in multiple states or companies with locations across state lines, tracking which overtime is subject to which state's tax rules could become quite complex. 3) **Audit implications**: The IRS will likely scrutinize overtime classifications more closely, so companies will need to be extra careful about properly documenting what constitutes legitimate overtime versus regular hours. 4) **Potential for abuse**: There might be pressure to restructure jobs or schedules to maximize tax-exempt overtime, which could lead to some unintended workplace dynamics. The implementation timeline will be crucial - payroll systems, HR policies, and accounting procedures will all need significant updates. Most proposals I've seen suggest at least a 6-month implementation period, but even that might be tight for larger organizations with complex payroll systems.