No Tax on Overtime Explained: Only the “Half” Is Deductible
The no tax on overtime deduction covers only the premium half of time-and-a-half pay, up to $12,500 ($25,000 joint). How to calculate it and what it saves.
The short version
- For 2025–2028 you can deduct the overtime premium — the extra half-time pay — not your whole overtime check.
- The deduction is capped at $12,500, or $25,000 on a joint return.
- Only overtime the federal Fair Labor Standards Act requires counts; state-law and contract overtime don’t.
- It lowers federal income tax only; Social Security and Medicare still apply.
- It phases down above $150,000 of income ($300,000 joint), and married couples must file jointly.
“No tax on overtime” was one of the headline promises of the One Big Beautiful Bill Act. The law that passed is narrower than the slogan: for tax years 2025 through 2028, you can deduct the premium portion of your overtime pay from federal taxable income. If you work a lot of overtime, it can still be worth several hundred dollars or more a year.
Only the premium is deductible
Federal law requires most hourly employees to be paid time and a half for hours over 40 in a workweek. Time and a half has two parts: your regular rate (the “time”), which stays fully taxable, and the extra 50% (the “half”), which is the qualified overtime you can deduct.
| Piece | Rate | Annual amount | Deductible? |
|---|---|---|---|
| Regular pay for overtime hours | $25.00/hr | $6,250 | No |
| Overtime premium (the “half”) | $12.50/hr | $3,125 | Yes |
| Total overtime pay | $37.50/hr | $9,375 | — |
A quick rule: the deductible premium is one third of your total time-and-a-half overtime pay. If you are paid double time, only the half-time required by federal law counts.
What overtime qualifies
- Only overtime required by the Fair Labor Standards Act — hours over 40 in a workweek for non-exempt employees.
- Overtime paid only because of state law (like California’s daily overtime), a union contract, or employer policy does not qualify.
- Salaried workers who are exempt from overtime rules don’t have qualifying overtime.
- For 2026, your employer reports qualified overtime on your W-2 in Box 12 with code TT — and you can deduct only the amount reported there.
Limits and phase-out
| Filing status | Maximum deduction | Phase-out starts (MAGI) | Fully phased out |
|---|---|---|---|
| Single or head of household | $12,500 | $150,000 | $275,000 |
| Married filing jointly | $25,000 | $300,000 | $550,000 |
Above the threshold, the maximum drops by $100 for each $1,000 of extra income. Married couples must file jointly to claim the deduction at all.
How much the overtime deduction saves
| Worker | Total income | Overtime pay | Deductible premium | Tax saved |
|---|---|---|---|---|
| Single, $25/hr, 5 OT hrs/week | $61,375 | $9,375 | $3,125 | $375 |
| Head of household | $58,000 | $7,500 | $2,500 | $300 |
| Married nurse, filing jointly | $95,000 | $18,000 | $6,000 | $720 |
| Single, high earner | $200,000 | $45,000 | $7,500 (phased down) | $1,800 |
Because most hourly workers are in the 12% bracket, every $1,000 of overtime premium saves about $120. In the last example, the premium would be $15,000, but the $12,500 cap and the phase-out above $150,000 reduce the deduction to $7,500. Estimate your own with the no tax on overtime calculator, or figure your overtime pay first with the overtime calculator.
Payroll taxes still apply
The deduction doesn’t change Social Security (6.2%) or Medicare (1.45%) withholding on your overtime. You can reduce federal income tax withholding by listing the expected deduction on Form W-4, Step 4(b), or simply claim it when you file and take the larger refund.
If you also earn tips, both deductions can apply on the same return — read how the tips deduction works. And if you are 65 or older, the new senior deduction can stack on top of both.
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Frequently Asked Questions
Is overtime tax-free in 2026?
No. Only the premium portion — the extra half of time-and-a-half pay — is deductible, up to $12,500 ($25,000 joint), and only from federal income tax. Your regular pay for overtime hours, plus Social Security and Medicare, are still taxed.
How do I calculate my qualified overtime?
Divide your total time-and-a-half overtime pay by three to estimate it — $9,000 of overtime pay includes a $3,000 premium. When you file, use the amount in Box 12, code TT of your 2026 W-2; for 2026 that reported figure is what you can deduct.
Does California daily overtime count?
Not unless it is also federal overtime. Only overtime required by the Fair Labor Standards Act — hours over 40 in a workweek — qualifies. Overtime owed only under state law, a union contract, or company policy doesn’t.
Can I claim the overtime deduction with the standard deduction?
Yes. It is a separate deduction available to both standard-deduction filers and itemizers.
Sources
- IRS IR-2026-28 — Schedule 1-A for the tips, overtime, car loan, and senior deductions
- IRS FS-2026-13 — Qualified overtime compensation deduction FAQs (Aug. 6, 2026)
- IRS Fact Sheet FS-2025-03 — Tax deductions for working Americans and seniors (tips, overtime, seniors)
- Congress.gov — H.R. 1, One Big Beautiful Bill Act (P.L. 119-21)
- IRS — One, Big, Beautiful Bill provisions (tips, overtime, and senior deductions)
- U.S. Department of Labor — Overtime pay under the Fair Labor Standards Act
This article is for general education and is not financial, tax, or legal advice. Figures reflect published IRS and SSA amounts as of the date above; verify current limits with the linked sources or a qualified professional before acting.
About the author
David Miles is the founder of FigureMoney and builds independent, source-backed personal-finance tools across the Modern Site Builders network. Every calculator and guide cites the IRS, SSA, or primary research behind its numbers.
Calculators in this guide
No Tax on Tips & Overtime Calculator
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Paycheck Calculator
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