No Tax on Overtime, explained

The rules in brief

• Years: tax years 2025 through 2028.
• What counts: only overtime the federal Fair Labor Standards Act requires (hours over 40 in a workweek), and only the premium: the part above your regular rate. For time and a half, that is the "half".
• What does not count: overtime required only by state law (such as California daily overtime), a union contract or employer policy. If an employer pays double time, only the FLSA-required half-rate premium counts.
• Cap: $12,500 a year, or $25,000 if married filing jointly.
• Income limit: the cap is reduced by $100 for each full $1,000 of modified adjusted gross income (MAGI) over $150,000 ($300,000 joint).
• Who can claim it: you need a valid Social Security number, and married couples must file jointly. You can claim it whether or not you itemize.
• What it reduces: federal income tax only. It is a deduction, not an exclusion: Social Security and Medicare taxes still apply, and state income tax depends on your state.
• Where it goes: Schedule 1-A (Form 1040), Part III. From 2026, employers report qualified overtime on Form W-2, box 12, code TT.

Worked example

Maria earns $25 an hour and works 45 hours a week for 40 weeks of the year. Each week she gets 5 hours of FLSA overtime at $37.50.

• Total overtime pay: $37.50 × 5 × 40 = $7,500
• Qualified overtime (the premium only): $12.50 × 5 × 40 = $2,500
• Her MAGI is $80,000, under the $150,000 limit, so there is no phase-out.
• In the 12% bracket, a $2,500 deduction lowers her federal income tax by about $300.

Her Social Security and Medicare withholding does not change, because the deduction only affects federal income tax.

Common misunderstandings

• "All my overtime is tax-free." No. Only the premium portion is deductible, and only up to the cap.
• "My paycheck withholding will go down automatically." The deduction is claimed on your return. You can adjust withholding on a new Form W-4 if you expect a refund.
• "California daily overtime counts." Only if the same hours are also FLSA overtime (over 40 in the week). Overtime required only by state law does not qualify.
• "Salaried workers qualify." Only non-exempt employees receive FLSA overtime. Exempt employees have no qualified overtime.

To work out the overtime itself, use the time and a half calculator or the overtime calculator. This page explains the IRS rules; it is not tax advice. Check the IRS pages below or a tax professional for your situation.