No Tax on Overtime Explained: What Counts and How Much

A plain-language summary of US federal law as of October 2026, not tax advice. Check the current Form 1040 instructions or ask a tax professional before you file.

The no tax on overtime calculator works out the premium, the cap and the phase-out from your rate, hours and income.

Estimate my deduction

The short version

The One Big Beautiful Bill Act, signed on 4 July 2025 as Public Law 119-21, added a new deduction to the tax code: section 225, qualified overtime compensation. For tax years 2025, 2026, 2027 and 2028 you can deduct the extra pay you get for overtime, up to $12,500 a year, or $25,000 on a joint return.

"No tax on overtime" is a slogan, not a description. Only part of your overtime pay counts, the deduction is capped, it shrinks for higher incomes, and it only reduces federal income tax.

What counts as qualified overtime

The law defines qualified overtime compensation as overtime pay required by section 7 of the Fair Labor Standards Act (FLSA) that is "in excess of the regular rate". In the IRS's words, that is the "half" portion of time-and-a-half pay.

Qualified overtime = regular rate × 0.5 × FLSA overtime hours

At $24 an hour, an overtime hour pays $36. $24 of that is your regular rate and $12 is the premium. Only the $12 counts. Put another way, the premium is one third of your total time-and-a-half pay: $36 ÷ 3 = $12.

FLSA overtime is hours over 40 in a workweek for non-exempt employees. The regular rate isn't always your base wage: under the FLSA it includes shift differentials and non-discretionary bonuses, which raise both the overtime you are owed and the premium that counts.

What doesn't count

The straight-time part of overtime pay. The $24 in the example above is taxed as normal.
Overtime only state law requires. California pays overtime after 8 hours in a day, but if your week stays under 40 hours, that overtime isn't FLSA overtime and doesn't qualify.
Extra generosity. If your employer pays double time for hours over 40, the FLSA only requires time and a half, so only half your regular rate per hour counts, not the full extra.
Overtime paid by contract or policy alone, such as overtime after 37.5 hours, or overtime for exempt salaried employees who aren't owed it under the FLSA.
Tips. They have their own deduction under section 224. See the no tax on tips calculator.

How much you can deduct

	Single, head of household	Married filing jointly
Cap	$12,500	$25,000
Phase-out starts at MAGI of	$150,000	$300,000
Full cap gone at MAGI of	$275,000	$550,000

Above the threshold, the deduction drops by $100 for each $1,000 of modified adjusted gross income (MAGI) over it. Schedule 1-A tells you to divide the excess by $1,000 and drop any fraction, so $9,999 over the threshold costs $900, not $999.90. For most people MAGI is simply AGI, Form 1040 line 11b; it adds back excluded foreign earned income and housing, and income from Puerto Rico or US possessions.

The deduction doesn't lower your AGI, so your overtime is still part of the income used for the phase-out. The amounts aren't adjusted for inflation.

Worked examples

Warehouse worker, single. $22 an hour, 6 overtime hours a week for 48 weeks = 288 hours. Premium: $22 × 0.5 × 288 = $3,168. MAGI $64,000, below $150,000, so the deduction is $3,168. In the 12% bracket that saves about $380 of federal income tax.

Nurse, single, high income. Qualified overtime $9,000. MAGI $172,400, which is $22,400 over $150,000. 22 full thousands × $100 = $2,200 reduction. Deduction: $9,000 − $2,200 = $6,800.

Two earners, joint. Premiums of $8,000 and $11,000 make $19,000, under the $25,000 joint cap. MAGI $240,000, below $300,000. Deduction: $19,000.

Lots of overtime. $45 an hour, 700 overtime hours: premium $15,750. Single, the cap limits it to $12,500.

How to claim it

You claim it on Schedule 1-A (Form 1040), Part III, whether you take the standard deduction or itemize. You need a valid Social Security number on the return, and married couples must file jointly; married filing separately gets no deduction.

For 2025, employers didn't have to report qualified overtime separately, so IRS Notice 2025-69 lets you work it out from your pay records. If a pay stub shows the premium on its own, use it. If it shows total overtime pay at time and a half, the premium is one third of it; at double time, one quarter. From 2026, employers report it on Form W-2 in box 12 with code TT, and that reported figure is what you use.

What it doesn't do

It doesn't change Social Security and Medicare tax. Those are still withheld on all overtime pay.
It doesn't automatically change your paycheck. The saving comes when you file, unless you adjust your W-4.
It doesn't apply to state income tax unless your state adopts it.
It doesn't last. Without new legislation, tax year 2028 is the last year.

To see what your overtime pay itself should be, use the overtime pay calculator first, then take the premium part.

No tax on overtime explained: what counts and how much you can deduct