No Tax on Overtime: Complete Guide to the New Deduction

The No Tax on Overtime deduction lets FLSA non-exempt employees deduct only the overtime premium — the "half" in time-and-a-half — up to $12,500 a year ($25,000 on a joint return) for tax years 2025 through 2028. At time-and-a-half, that premium is one-third of your overtime pay, so most workers deduct far less than their total overtime. The deduction shrinks by $100 for each full $1,000 of modified AGI above $150,000 ($300,000 joint), and it does not reduce Social Security or Medicare tax.

The deduction was created by section 70202 of Public Law 119-21 (the One Big Beautiful Bill Act, signed July 4, 2025), which added section 225 to the Internal Revenue Code. The IRS calls it part of the Working Families Tax Cuts; see our overview of the Working Families Tax Cuts for the other new deductions.

What counts as qualified overtime compensation?

Qualified overtime compensation is overtime pay required by section 7 of the Fair Labor Standards Act that exceeds your regular rate. The IRS overtime FAQs (FS-2026-13) give the formula employers use for most workers:

Hours over 40 in the workweek × ½ × your FLSA regular rate = qualified overtime for that week

Example: you earn $20 an hour and work 50 hours in a week. Your employer owes $30 an hour for the 10 overtime hours, or $300. Of that, $200 is straight-time pay for those hours and $100 is the premium. Only the $100 is qualified overtime compensation.

That gives a simple shortcut for anyone paid exactly time-and-a-half: qualified overtime = total overtime pay ÷ 3.

What does not count

• The straight-time portion of overtime hours. It stays fully taxable.
• Extra premium beyond what the FLSA requires. If you get double time, only the half-time premium the FLSA requires counts. In the IRS example, a $20-an-hour worker paid double time for 10 hours receives $400, but only $100 is qualified.
• Overtime paid only under state law, a union contract, or company policy — for example, daily overtime after 8 hours when you worked 40 or fewer hours that week, or overtime after 35 hours. The FAQs say employers must apply the FLSA rules to decide how much was actually required.
• Shift differentials, on-call pay, holiday premiums, bonuses, and commissions, unless they are part of the FLSA-required premium. Non-discretionary bonuses and shift differentials can raise your FLSA regular rate, which raises the premium, but they are not themselves overtime.
• Pay to FLSA-exempt employees. If you are exempt (most salaried executive, administrative, and professional staff, outside salespeople, certain computer professionals, and others listed in the FAQs), you have no qualified overtime even if your employer pays you overtime voluntarily.

Special FLSA methods apply to hospital and residential-care workers, police and firefighters paid on a work-period basis under section 7(k), and public employees who take compensatory time. In those cases the qualified amount is the premium actually paid under that provision; for state and local comp time, it is counted when the comp time is used or cashed out, not when it is earned.

Who qualifies for the overtime deduction?

You can claim it if all of these are true:

1. You are an FLSA overtime-eligible employee — covered by the FLSA and not exempt from its overtime rules. Federal employees can check block 35 of their Standard Form 50 ("N" means nonexempt).
2. Your qualified overtime is reported to you on Form W-2 (or, rarely, on Form 1099-NEC or 1099-MISC when an FLSA employee is treated as a contractor for tax purposes).
3. You have a Social Security number valid for employment, issued before your return's due date.
4. If married, you file jointly. Married filing separately cannot claim it.
5. Your MAGI is below the point where the phase-out reaches zero for your amount of overtime.

Self-employed people, independent contractors, and business owners do not have FLSA overtime. An employee who owns at least 20% of the business and is actively involved in managing it is treated as an exempt executive.

How much does the deduction save? Worked examples

The examples below use 2026 brackets and standard deductions ($16,100 single, $32,200 joint, $24,150 head of household) and assume overtime is paid at exactly time-and-a-half with no other income or adjustments. Savings equal the deduction times the federal bracket it comes out of. You can check your own bracket with the federal tax bracket calculator.

Nurse, single

• Regular rate $35/hour; base pay $35 × 2,080 hours = $72,800
• Overtime: 8 hours a week × 48 weeks = 384 hours × $52.50 = $20,160 overtime pay
• Qualified premium: 384 × $17.50 = $6,720
• MAGI: $72,800 + $20,160 = $92,960 (below $150,000, no phase-out)
• Taxable income before the deduction: $92,960 − $16,100 = $76,860 (22% bracket)
• Deduction: $6,720; taxable income drops to $70,140, still in the 22% bracket
• Federal income tax saved: $6,720 × 22% = $1,478

Factory worker, married filing jointly

• Regular rate $28/hour; base pay $58,240; spouse earns $30,000
• Overtime: 600 hours × $42 = $25,200 overtime pay
• Qualified premium: 600 × $14 = $8,400
• MAGI: $58,240 + $25,200 + $30,000 = $113,440
• Taxable income before the deduction: $113,440 − $32,200 = $81,240 (12% bracket)
• Federal income tax saved: $8,400 × 12% = $1,008

Police officer, married filing jointly

• Base pay $85,000; overtime pay $22,000 at time-and-a-half; spouse earns $45,000
• Qualified premium: $22,000 ÷ 3 = $7,333 (well under the $25,000 joint cap — the cap is not the deduction)
• MAGI: $152,000; taxable income before the deduction: $119,800 (22% bracket)
• Federal income tax saved: $7,333 × 22% = $1,613

Many police departments compute overtime under the section 7(k) work-period rules. The officer's actual qualified amount is whatever premium the department reports in box 12, code TT.

Retail worker, head of household

• Base pay $45,000; overtime pay $6,000
• Qualified premium: $6,000 ÷ 3 = $2,000
• Taxable income before the deduction: $51,000 − $24,150 = $26,850 (12% bracket)
• Federal income tax saved: $2,000 × 12% = $240

Electrician who hits the cap, single

• Regular rate $40/hour; base pay $83,200
• Overtime: 15 hours a week × 50 weeks = 750 hours × $60 = $45,000 overtime pay
• Qualified premium: 750 × $20 = $15,000, capped at $12,500
• MAGI: $128,200; taxable income before the deduction: $112,100
• The deduction straddles two brackets: the first $6,400 comes off income above the 24% bracket's floor ($105,700), the remaining $6,100 off 22% income
• Federal income tax saved: $6,400 × 24% + $6,100 × 22% = $1,536 + $1,342 = $2,878

What is the realistic maximum?

A single filer gets the full deduction only with MAGI at or below $150,000, which keeps taxable income in the 24% bracket or lower, so the most a single or head-of-household filer can save is about $3,000 (12,500 × 24%). A joint return below $300,000 of MAGI is also in the 24% bracket at most, for a ceiling of about $6,000. Higher brackets only apply once the phase-out has already shrunk the deduction.

How does the phase-out work?

Above $150,000 of MAGI ($300,000 joint), the deduction is reduced by $100 for each full $1,000 of excess. Schedule 1-A tells you to round the division down to a whole number. The reduction comes off your capped qualified overtime, not off the $12,500 limit, so a small amount of overtime disappears sooner.

Schedule 1-A, Part III, works like this:

1. Line 14c: qualified overtime from your W-2s (and any 1099).
2. Line 15: the smaller of line 14c or $12,500 ($25,000 joint).
3. Lines 16–18: MAGI minus $150,000 ($300,000 joint). If zero or less, your deduction is line 15.
4. Line 19: divide the excess by $1,000 and drop any fraction.
5. Line 20: multiply by $100.
6. Line 21: line 15 minus line 20, but not below zero.

Example: single, MAGI $175,500, qualified overtime $15,000. Line 15 is $12,500. Excess MAGI is $25,500; $25,500 ÷ $1,000 = 25.5, rounded down to 25; 25 × $100 = $2,500. Deduction: $12,500 − $2,500 = $10,000.

Same income, smaller overtime: with $4,000 of qualified overtime, the deduction is $4,000 − $2,500 = $1,500, not $4,000.

Phase-out table for single and head-of-household filers

For joint filers, the reduction starts at $300,000 and a $25,000 deduction reaches zero at $550,000 of MAGI.

What is MAGI for this deduction?

Schedule 1-A Part I starts with your AGI from Form 1040 and adds back only excluded income from Puerto Rico, the foreign earned income and housing exclusions (Form 2555), and excluded American Samoa income (Form 4563). For most workers, MAGI equals AGI. Pre-tax 401(k), 403(b), and HSA payroll contributions are already out of AGI, so they also lower MAGI.

How to claim the overtime deduction

Tax year 2025 returns

Employers were not required to report qualified overtime separately for 2025. Under IRS Notice 2025-69, you may use reasonable methods based on your pay stubs and other records:

• If your employer voluntarily reported the premium (often in W-2 box 14 or on a separate statement), use that.
• If your pay stubs show the premium separately, add up the premium.
• If they show only total overtime pay at time-and-a-half, use one-third of it. The notice has a similar fraction for double time and lets you adjust if the fraction understates the real FLSA premium.

Tax years 2026 through 2028

Starting in 2026, employers must report qualified overtime on Form W-2, box 12, code TT. The IRS FAQs are strict about it:

• You can deduct only what is reported in box 12, code TT (and only what was actually paid).
• If the amount is too low or missing, ask your employer for a Form W-2c. Without one, you cannot deduct the difference.
• A Form 4852 substitute W-2 does not work for this deduction.
• Box 12, code TT shows your full premium even above $12,500; the cap and phase-out are applied on Schedule 1-A.

Filing steps

1. Complete Schedule 1-A Part I (MAGI) and Part III (overtime).
2. Line 38 of Schedule 1-A totals all four new deductions and goes on Form 1040, line 13b.
3. Claim it whether you take the standard deduction or itemize.

If you filed a 2025 return without the deduction, you can file Form 1040-X with Schedule 1-A attached. The IRS says amended returns generally take 8 to 12 weeks to process and sometimes up to 16; you can track them with Where's My Amended Return.

Limits that reduce the real benefit

Payroll taxes still apply to every overtime dollar

The deduction is income tax only. On $10,000 of time-and-a-half pay:

• Employee FICA: $10,000 × 7.65% = $765 (plus 0.9% Additional Medicare tax on wages over $200,000)
• Qualified premium: $10,000 ÷ 3 = $3,333
• Income tax saved at 22%: $3,333 × 22% = $733

So the income tax saving is less than the payroll tax on the same overtime. See the paycheck after-tax calculator to model take-home pay on overtime checks.

It does not lower AGI

The deduction comes after AGI (Form 1040 line 13b), so it does not help with AGI-based tests: Roth IRA contribution limits, the taxable share of Social Security benefits, Medicare IRMAA surcharges, or premium tax credits. It does lower taxable income, which is what sets your bracket.

Withholding does not change automatically

Overtime is still subject to income tax withholding. Your employer can reduce withholding only if you give it a new Form W-4. The 2026 Form W-4 lets you enter your expected overtime deduction in step 4(b). Use the tax withholding calculator or the IRS Tax Withholding Estimator to size it; if you skip this, the benefit arrives as a larger refund.

State income tax

This is a federal deduction. Whether your state allows it depends on how your state conforms to the federal tax code, so check your state revenue department. Nine states do not tax wage income at all: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.

It ends after 2028

Section 225 applies to tax years beginning before January 1, 2029. Unless Congress extends it, overtime earned in 2029 gets no deduction.

Overtime and tips on the same return

The tips deduction and the overtime deduction are separate parts of Schedule 1-A with separate caps, so you can claim both on different dollars. The tips cap is $25,000 per return regardless of filing status; the overtime cap is $12,500, or $25,000 joint. Both use the same $150,000/$300,000 phase-out thresholds.

Example: a single server with MAGI of $70,000 has $18,000 of qualified tips and $4,000 of time-and-a-half overtime pay. Tips deduction: $18,000. Overtime deduction: $4,000 ÷ 3 = $1,333. Total: $19,333.

For the detailed comparison, see tips vs. overtime: which deduction applies, the No Tax on Tips guide, and the No Tax on Tips calculator.

Planning moves that actually help

Lower MAGI if you are just over the threshold

Pre-tax retirement and HSA contributions reduce MAGI. Single filer with MAGI of $152,000 and $12,500 of qualified overtime:

• Excess $2,000 → reduction $200 → deduction $12,300
• Add $3,000 of pre-tax 401(k) deferrals → MAGI $149,000 → deduction $12,500
• Taxable income is in the 24% bracket, so the restored $200 of deduction saves $48, and the $3,000 deferral itself saves $720 — about $768 in total

The 2026 limits are $24,500 for a 401(k) and $4,400 (self-only) or $8,750 (family) for an HSA.

Get your W-2 right

Check box 12, code TT against your year-end pay stub. A rough check for time-and-a-half workers: code TT should be about one-third of the overtime pay on your stub. If it is missing or clearly low, ask payroll for a W-2c before you file.

Know whether your extra pay is FLSA overtime

If you are paid daily overtime under state law (common in California) or overtime after 37.5 hours under a union contract, only the portion that the FLSA would have required for hours over 40 in the workweek counts. Your box 12 figure may therefore be lower than you expect.

Common mistakes

• Deducting total overtime pay. $20,000 of time-and-a-half pay is about $6,667 of qualified overtime, not $13,333 or $20,000.
• Treating the cap as the deduction. $22,000 of overtime pay on a joint return does not produce a $25,000 deduction; it produces about $7,333.
• Applying the phase-out to the cap instead of to your amount. The reduction comes off the smaller of your premium or the cap.
• Filing separately. Married filing separately gets no deduction.
• Assuming exempt-employee overtime counts. If your job is FLSA-exempt, voluntary overtime pay is not qualified.

Run your own numbers

Use the No Tax on Overtime calculator above: enter your qualified overtime premium (box 12, code TT, or one-third of time-and-a-half pay), not your total overtime pay. For the other new deductions in the same law, see the 2026 tax changes guide and the Working Families Tax Cuts hub.

This guide explains federal rules as published by the IRS through August 2026. It is general information, not tax advice for your situation.