No Tax on Overtime: How the Deduction on the Overtime Premium Really Works

From 2025 through 2028, federal tax law gives many hourly workers a new break: a deduction for part of their overtime pay. It is commonly called "no tax on overtime," but the name oversells it. The deduction, created by the One Big Beautiful Bill Act and codified at Internal Revenue Code §225, does not make all of your overtime tax-free. It lets you deduct only the premium portion of overtime pay — the extra "half" in time-and-a-half — and it comes with caps, income limits, and paperwork rules. This guide explains exactly what counts, who qualifies, and how to claim it.

Only the premium half is deductible

The Fair Labor Standards Act (FLSA) requires overtime to be paid at no less than 1.5 times your regular rate for hours beyond 40 in a week. When you are paid time-and-a-half, your pay for each overtime hour has two parts: the regular rate you would have earned anyway, and an extra 50% premium on top. Only that extra premium is "qualified overtime compensation" for the deduction.

So if your regular rate is $20 an hour and you work an overtime hour at $30, the deductible amount for that hour is $10 — the premium — not the full $30, and not the full overtime paycheck. The base-pay portion of overtime is taxed exactly as it always was. If your employer pays more than the FLSA requires (for example, double time when the law only demands time-and-a-half), the deductible portion is still measured by the FLSA premium, not by the more generous company policy.

The basic rules and limits

The phase-out works gradually. A single filer with modified adjusted gross income (MAGI) of $160,000 is $10,000 over the threshold, so the maximum deduction falls by $1,000 (10 × $100), from $12,500 to $11,500. Earn enough and the benefit shrinks to zero: by $275,000 of MAGI for single filers, or $550,000 for joint filers, there is no deduction left.

What the deduction does not change

• FICA still applies in full. Overtime pay remains subject to Social Security and Medicare taxes. The deduction only reduces federal income tax.
• State income tax usually still applies. Most states have not adopted a matching deduction, so your overtime premium is generally still taxable at the state level unless your state says otherwise.
• Your withholding does not automatically change. The deduction is claimed on your tax return; your paycheck throughout the year is generally withheld as before.
• Only FLSA overtime counts. The premium must be for overtime required under the FLSA. Extra pay for weekends, holidays, or daily overtime that federal law does not require does not qualify merely because your employer calls it overtime — although overtime required by a state law or contract may be treated under separate guidance, the core federal rule is the FLSA premium.

A worked example

Suppose you earn $25 an hour and regularly work 10 hours of overtime a week, paid at time-and-a-half, for 52 weeks.

1. Overtime hours for the year: 10 × 52 = 520 hours.
2. Premium per overtime hour: 0.5 × $25 = $12.50.
3. Qualified overtime for the year: 520 × $12.50 = $6,500.

That $6,500 is below the $12,500 single-filer cap, so — assuming your income is under the phase-out — you could deduct the full amount. If your marginal federal tax bracket is 22%, the deduction saves about $6,500 × 22% = $1,430 in federal income tax. The saving scales with your bracket: the same deduction is worth less at a lower rate and more at a higher one.

Claiming it for 2025: the transition year

Because the law arrived mid-year, 2025 is a transition year. Employers were not required to separately track or report qualified overtime on 2025 W-2 forms, so most workers must work out the premium amount themselves from their final pay stub of the year. The IRS issued two pieces of guidance to make this workable:

• Notice 2025-62 provides penalty relief: employers and payers will not be penalized for failing to report qualified overtime (and qualified tips) separately for 2025.
• Notice 2025-69 explains how workers can determine their deductible amount for 2025 using pay stubs, earnings statements, or employer-provided figures.

The practical shortcut from that guidance depends on how your stub shows overtime pay:

• If your stub shows a combined overtime total paid at time-and-a-half (rate and premium lumped together), the premium portion is one third of that total. At time-and-a-half, the combined amount is 1.5 parts, of which the premium is 0.5 parts — and 0.5 ÷ 1.5 = 1/3.
• If the combined total reflects double time, the FLSA premium portion is one quarter of the total, because the FLSA-required premium (half of the regular rate) is one quarter of a payment made at twice the regular rate.
• If your stub already separates the premium (some show an "overtime premium" line), use that figure directly.

Whichever method you use, keep the pay stub or statement you relied on with your tax records.

Schedule 1-A and what changes from 2026

The deduction is claimed on the new Schedule 1-A (Additional Deductions), the same form used for the new deductions for tips, car loan interest, and the enhanced senior deduction. You do not need to itemize to use it — it works alongside the standard deduction.

From 2026 onward, the estimation era ends. Employers must report qualified overtime compensation separately — the W-2 is being updated so the deductible premium amount appears as its own figure rather than something you reconstruct from stubs. That should make the 2026 return considerably simpler: you will read the number off your W-2 instead of calculating it.

Key takeaways

• Only the premium half of FLSA overtime pay is deductible — never the full overtime amount.
• The deduction is capped at $12,500 (single) or $25,000 (joint) and phases out above $150,000 / $300,000 of MAGI, disappearing at $275,000 / $550,000.
• It runs for 2025–2028, needs no itemizing, requires an SSN, and is not available if you file married filing separately.
• FICA and (usually) state tax still apply to overtime pay in full.
• For 2025 you estimate the premium from pay stubs (one third of a time-and-a-half total; one quarter of a double-time total); from 2026 it is reported on your W-2.

To see what your own overtime premium could be worth, run your hours and rate through our No Tax on Overtime Calculator, and read our guide to how overtime pay itself is calculated under the FLSA if you want the pay rules behind the tax rule.

Keep exploring

• How Paycheck Tax Is Calculated, Step by Step
• 2026 Federal Income Tax Brackets, Explained
• FICA Taxes Explained: Social Security and Medicare
• The 2026 Standard Deduction, Explained

Put the numbers to work: Paycheck Calculator · No Tax on Overtime Calculator · No Tax on Tips Calculator

Last updated: 2026-10-31. Tax parameters: 2026 (IRS Rev. Proc. 2025-32; SSA wage base; Tax Foundation state tables).