When Does No Tax on Overtime Start in Texas? 2025 Guide
In 2025, a growing policy conversation is catching the attention of employees and employers alike: eliminating federal taxes on overtime pay. While no law has been passed yet, the “No Tax on Overtime Pay” proposal is being discussed as a potential way to boost workers' take-home pay and encourage extra hours on the job.
As the debate unfolds in Washington, Texans are wondering how this could affect their paychecks—and what the rules are right now. Here's a full breakdown of how overtime is taxed today, how a tax exemption might work, and common myths that need clearing up.
Is Overtime Taxed in Texas?
Texas is one of only nine U.S. states that do not impose a personal income tax. This means that no matter how many hours you work—whether it's your standard 40 hours or additional overtime—the State of Texas won’t deduct any income tax from your paycheck. This tax-friendly environment is one reason many workers and businesses are drawn to Texas.
However, this does not mean your overtime pay is completely tax-free. Federal taxes still apply to all earned income, including overtime wages. This includes:
Federal income tax withholding, which is based on your total income and filing status
Social Security tax at 6.2%, up to the annual wage limit
Medicare tax at 1.45%, with an additional 0.9% surtax for high earners
So while Texans don’t have to worry about state-level taxes, the IRS still claims a portion of every paycheck—including any extra income from overtime hours. It’s important to understand these federal deductions so you can plan accordingly and make the most of your take-home pay.
How Would No Taxes on Overtime Work in Texas?
The core idea behind the proposed “No Tax on Overtime Pay” policy is to exempt overtime wages from federal income tax, allowing workers to keep more of what they earn when they go above and beyond their regular hours. However, this proposal would not eliminate all taxes—Social Security and Medicare taxes would still apply, as these are mandatory federal payroll taxes tied to all earned income.
Here’s how the policy could function if enacted:
Only overtime wages—typically defined as hours worked beyond 40 hours per week—would be excluded from federal income tax calculations.
Regular base pay, bonuses, and commissions would remain fully taxable under the current federal tax system.
Employers would be required to clearly separate overtime pay from regular wages on pay stubs, so payroll systems can accurately apply different withholding rules.
Because income taxes are governed at the federal level, this change would require congressional legislation and IRS guidance—state laws cannot independently implement or override federal tax policy.
As of now, no federal law has been passed to make this policy a reality. However, the idea is gaining momentum in political and economic circles as a potential way to combat inflation, incentivize workforce participation, and help Americans struggling with the rising cost of living. If enacted, it could provide meaningful financial relief to millions of hourly and frontline workers across the country, including those in Texas.
When Does No Tax on Overtime Start in Texas?
As of April 2025, there is no confirmed start date for a tax-free overtime policy in Texas—or anywhere else in the United States. While the idea is being discussed at the federal level, no legislation has been signed into law, and the policy remains in the proposal stage.
For such a significant change to take effect, several important steps would need to occur:
Congress must pass a bill that amends the Internal Revenue Code to specifically exempt overtime wages from federal income tax. This would require bipartisan support and a formal vote in both the House and Senate.
Once passed, the IRS would need to issue detailed guidance for how the new rules should be applied. This would include updated tax forms, payroll instructions, and compliance timelines.
Employers across the country would have to modify their payroll systems to properly identify, separate, and report overtime pay. This is crucial to ensure only overtime wages are tax-exempt and that base wages and bonuses continue to be taxed correctly.
Until all of these steps are completed and a clear implementation timeline is announced, federal income tax will continue to apply to overtime pay just as it does to regular wages.
Employees should stay informed by following official IRS updates or tracking legislation in Congress. For now, any extra hours worked are still taxed under the current federal tax rules.
Is Overtime Taxable in 2025?
Yes. As of 2025, federal income tax still applies to all earned income, including overtime wages.
There’s no separate “overtime tax”—the IRS simply taxes your total income, including base and overtime pay, using its progressive tax brackets.
So, working overtime might bump you into a higher bracket, but that higher rate only applies to the portion of income above the bracket threshold—not your entire paycheck.
Is Overtime Taxed at 40%?
No, that’s a common myth.
There is no special 40% tax rate on overtime pay. Here's why that confusion happens:
Some payroll systems withhold taxes from overtime or bonuses at a flat rate, often 22%.
Workers may also see a larger chunk withheld temporarily if they work a lot of overtime in one pay period.
Add Social Security and Medicare, and it can feel like 40% is missing, even though actual tax owed could be lower after filing your return.
If you want a more accurate picture of what you're really paying, use a paycheck calculator or check your IRS tax withholding tables.
Who Is Exempt from Overtime Pay in Texas?
Not all employees are entitled to overtime pay. Under the Fair Labor Standards Act (FLSA), some workers are exempt based on their job duties and salary level.
Here’s who may be exempt:
Salaried employees earning at least $684/week, if they work in:
Executive roles
Administrative or professional positions
Outside sales
Independent contractors
Certain agricultural or transportation workers
If you don’t qualify for overtime pay, then this proposed tax policy wouldn’t affect you, since there would be no overtime earnings exempt from tax.
Conclusion
To recap:
Texas doesn’t tax income, so your overtime pay is already free from state tax.
But as of 2025, federal income tax still applies to overtime wages.
The idea of federal tax-free overtime pay is still under discussion, with no start date set.
If passed, the policy could mean larger take-home paychecks for millions of hourly workers.
Stay informed by watching IRS announcements or Congressional developments—and if you want to make the most of your overtime earnings now, talk to a tax professional about optimizing your withholdings.
FAQs
Is overtime taxed in Texas?
Texas doesn’t have a state income tax, but federal taxes (income, Social Security, Medicare) still apply.
How would there be no taxes on overtime work?
It would exempt overtime pay from federal income tax only, while keeping regular pay taxable. No law has passed yet.
Is overtime taxable in 2025?
Yes, all earnings including overtime are taxed under current federal laws.
Is overtime taxed at 40%?
No. That’s a myth. Withholding may feel high, but actual tax is based on your total income and filing status.
Who is exempt from overtime pay in Texas?
Salaried exempt workers, contractors, and some industry-specific employees may not qualify for overtime under FLSA rules.