How does no tax on overtime work?
“No tax on overtime” is the popular name for a federal income tax deduction created by the One, Big, Beautiful Bill Act (Public Law 119-21). It does not make overtime tax free. Your overtime is still wages and is still taxed when it is paid. The break comes when you file, by subtracting part of that pay from your taxable income.
Here are the rules, from IRS guidance:
- Years: tax years 2025 through 2028.
- What qualifies: only overtime the Fair Labor Standards Act (FLSA) requires, and only the part above your regular rate. For time and a half, that is the “half.”
- Limit: up to $12,500 per return, or $25,000 on a joint return.
- Income phase-out: the deduction shrinks once modified adjusted gross income (MAGI) passes $150,000, or $300,000 for joint filers.
- Filing rules: you need a Social Security number valid for employment, married couples must file jointly, and you claim it on Schedule 1-A of Form 1040.
- Itemizing: not required. The deduction works alongside the standard deduction.
Schedule 1-A carries the total to line 13b of Form 1040, after adjusted gross income is figured. So the deduction lowers taxable income, and your savings equal the deduction times the tax bracket it comes out of.
The calculator above does that math. It multiplies your overtime hours by half your hourly rate for each week, applies the cap and income phase-out for your filing status, and compares federal income tax at 2026 rates with and without the deduction.
What counts as qualified overtime compensation?
The IRS defines qualified overtime compensation as overtime pay required under section 7 of the FLSA that is more than your regular rate. For most hourly workers, its FAQ gives this formula for each workweek:
Overtime hours over 40 x regular hourly rate x 0.5 = qualified overtime for the week
At $24 an hour, 6 overtime hours give 6 x $24 x 0.5 = $72 of qualified overtime that week, even though your overtime pay is 6 x $36 = $216. Over 50 weeks like that, the deductible premium is $3,600.
Three details change the number:
- Each workweek stands alone. A workweek is a fixed 168-hour period, and hours cannot be averaged. Working 35 hours one week and 45 the next still means 5 overtime hours.
- Your regular rate can be higher than your base wage. Nondiscretionary bonuses and shift differentials raise the FLSA regular rate, which raises the premium. Our overtime calculator guide shows how to figure the regular rate when a bonus is involved.
- Pay above the legal minimum does not count. If your employer pays double time, only the half-time premium the FLSA requires qualifies. In the IRS example, 10 overtime hours at $20 an hour paid at double time cost the employer $400, but only $100 is qualified overtime.
If your timecard shows hours and minutes, convert them first with the time to decimal calculator.
Who qualifies for the overtime deduction and who does not?
| Situation | Counts toward the deduction? |
|---|---|
| Hourly nonexempt employee paid time and a half after 40 hours | Yes, the extra half |
| Salaried nonexempt employee paid FLSA overtime | Yes, the half-time premium on the FLSA regular rate |
| Exempt executive, administrative, professional, outside sales or certain computer employee | No, even if the employer pays overtime anyway |
| Double time, or any premium above what the law requires | Only the half-time premium the FLSA requires |
| Overtime owed only under state law, a union contract or company policy (after 8 hours in a day, after 35 hours a week, weekends, holidays) | Only the part the FLSA also requires for hours over 40 in the workweek |
| Employee who owns at least 20% of the business and is active in managing it | No, treated as an exempt executive |
| Other FLSA overtime exemptions, such as certain commissioned retail employees, motor carrier employees, seasonal amusement workers and some farm workers | No |
| State or local government employee who earns comp time | Yes, when the comp time is used or cashed out and paid as wages |
| Federal employee marked “N” (nonexempt) in block 35 of the SF-50 | Yes, the one-half portion under OPM’s FLSA rules |
| Independent contractor who is not an employee under the FLSA | No |
| Married filing separately, or no Social Security number valid for employment | No |
How much will no tax on overtime save you?
These examples use 2026 federal brackets and the standard deduction ($16,100 single, $32,200 joint), assume no other income, deductions or credits, and count regular pay for 52 weeks, as the calculator above does.
Example 1: time and a half, single filer
Casey Morgan earns $22 an hour at Northwind Logistics and works 6 overtime hours a week for 50 weeks.
- Regular pay: 40 x $22 x 52 = $45,760
- Overtime pay: 6 x $33 x 50 = $9,900
- Qualified premium: 6 x $22 x 0.5 = $66 a week, x 50 = $3,300
- Taxable income: $55,660 - $16,100 = $39,560, in the 12% bracket
- Federal income tax saved: $3,300 x 12% = $396
Example 2: double time, single filer
Jordan Lee earns $28 an hour at Contoso, which pays double time for every overtime hour. Jordan works 8 overtime hours a week for 48 weeks.
- Regular pay: 40 x $28 x 52 = $58,240
- Overtime pay at double time: 8 x $56 x 48 = $21,504
- Qualified premium: 8 x $28 x 0.5 = $112 a week, x 48 = $5,376
- Taxable income: $79,744 - $16,100 = $63,644, in the 22% bracket
- Federal income tax saved: $5,376 x 22% = about $1,183
Contoso pays a $28 premium for each overtime hour, but the FLSA requires only $14 of it, so only $14 an hour counts.
Example 3: heavy overtime that hits the cap
Avery Brooks, a single filer, earns $38 an hour at Fabrikam and works 20 overtime hours a week for 50 weeks.
- Regular pay: 40 x $38 x 52 = $79,040
- Overtime pay: 20 x $57 x 50 = $57,000
- Qualified premium: 20 x $38 x 0.5 = $380 a week, x 50 = $19,000
- Deduction: capped at $12,500. MAGI of $136,040 is under $150,000, so there is no phase-out.
- Taxable income: $136,040 - $16,100 = $119,940, in the 24% bracket
- Federal income tax saved: $12,500 x 24% = $3,000
Avery’s 2026 W-2 would still show the full $19,000 with code TT. The cap is applied on Schedule 1-A, not by the employer.
How does the overtime deduction phase out at higher incomes?
Schedule 1-A applies the phase-out in four steps:
- Take the smaller of your qualified overtime or the cap ($12,500, or $25,000 joint).
- Subtract $150,000 ($300,000 joint) from your MAGI. For most people, MAGI is the adjusted gross income on Form 1040 line 11b, plus certain excluded foreign or U.S. territory income.
- Divide the excess by $1,000 and round down to a whole number.
- Multiply by $100 and subtract the result from step 1.
Phase-out example. Sam and Alex Rivera file jointly. Sam earns $45 an hour and works 10 overtime hours a week for 50 weeks. Alex earns a $190,000 salary.
- Sam’s regular pay: 40 x $45 x 52 = $93,600
- Sam’s overtime pay: 10 x $67.50 x 50 = $33,750
- Qualified premium: 10 x $45 x 0.5 x 50 = $11,250, under the $25,000 joint cap
- MAGI: $93,600 + $33,750 + $190,000 = $317,350
- Excess over $300,000: $17,350, which rounds down to 17, and 17 x $100 = $1,700
- Deduction: $11,250 - $1,700 = $9,550
- Federal income tax saved in the 24% bracket: $2,292
With the full $12,500, a single filer’s deduction reaches zero at $275,000 of MAGI. A joint return with the full $25,000 reaches zero at $550,000.
Is overtime tax free now?
No. The deduction lowers federal income tax only, and you see it at filing time unless you change your withholding.
- Social Security and Medicare: The IRS says overtime is still wages for Social Security, Medicare and federal unemployment taxes. You pay 6.2% for Social Security (up to the $184,500 wage base in 2026) and 1.45% for Medicare on every overtime dollar.
- Federal withholding: Your employer keeps withholding income tax from overtime as usual.
- State income tax: Each state decides whether to follow the federal deduction, write its own version or skip it. Alabama, for example, allows its own deduction of up to $1,000 of overtime premium pay a year for 2026 through 2028. Hawaii’s 2026 conformity law adopted the federal tips deduction but not the overtime deduction. Check with your state revenue department.
Casey from Example 1 still pays $757.35 in Social Security and Medicare on $9,900 of overtime pay, compared with $396 saved in federal income tax.
How is qualified overtime reported on your W-2?
For 2025 returns. Employers did not have to report qualified overtime separately on 2025 Forms W-2 or 1099, and Notice 2025-62 waived the related penalties for that year. Notice 2025-69 let workers use reasonable methods instead, such as:
- a year-end pay stub or payroll statement that shows the overtime premium on its own
- one-third of a combined “overtime” total when overtime is paid at time and a half, because that total includes straight-time pay for those hours
- one-fourth of a combined total when overtime is paid at double time
Those methods still apply if you are filing or amending a 2025 return.
For 2026 and later. Employers must report qualified overtime on Form W-2 in box 12 with code TT. The IRS FAQ adds three rules that matter when you file:
- You can deduct only qualified overtime that appears in box 12 with code TT. The 2025 relief does not carry forward.
- If code TT is missing or too low, ask your employer for a corrected Form W-2c. A substitute W-2 (Form 4852) does not count for this deduction.
- If code TT is too high, you may use only the amount you were actually paid.
Code TT shows your total qualified overtime, even above the cap, so it can be larger than your deduction.
How do you get the overtime deduction in your paycheck?
Your employer cannot reduce withholding for the deduction on its own. The IRS says withholding changes only after you turn in an updated Form W-4.
The 2026 Form W-4 has a Step 4(b) Deductions Worksheet. If your total income is under $150,000 ($300,000 joint), enter your estimated qualified overtime on line 1b, up to $12,500 ($25,000 joint), and carry the worksheet total to Step 4(b). The IRS Tax Withholding Estimator also accounts for the deduction.
Spread over a full year, Casey’s $396 is about $15 per biweekly paycheck. A W-4 filed late in the year spreads the change over fewer checks, so see how many pay periods are in a year for your schedule. If your overtime ends up lower than you estimated, you could owe tax when you file.
To see overtime in your full take-home pay, use the paycheck calculator. If you also earn tips, the no tax on tips calculator covers that separate deduction.
These are general federal rules. Because FLSA status, your regular rate and state rules depend on your job, a tax professional can confirm how the deduction applies to your own return.