No Tax on Overtime: How the Deduction Works and Who Qualifies

No tax on overtime sounds like overtime pay escapes tax. It does not. The law enacted in 2025 creates a federal income tax deduction for qualified overtime compensation, capped at $12,500 per individual return and $25,000 on a joint return, for tax years 2025 through 2028. Only the premium portion counts: the extra half in time-and-a-half pay that the Fair Labor Standards Act requires. The regular rate portion of overtime hours remains fully taxable, Social Security and Medicare taxes still apply to all of it, and the deduction phases out at higher incomes. This guide works through each limit, because the name promises far more than the law delivers.

What counts: the premium half only

Suppose you earn $20 an hour and work 50 hours in a week. The first 40 hours pay $800 at the regular rate. The 10 overtime hours pay time and a half, $30 an hour, for $300. Of that $300, $200 is the regular rate for those 10 hours and $100 is the premium, the extra half. Only the $100 is qualified overtime compensation. The deduction, if you qualify in full, is $100 for that week, not $300.

That distinction is the whole law in one paragraph. Voluntary overtime premiums an employer offers beyond what the FLSA requires, double-time premiums beyond the required half in most cases, and overtime paid under state law alone without an FLSA requirement generally do not count, unless IRS guidance treats them as qualified. The premium must also be separately reported, on Form W-2 in box 12 with code TT from 2026, and a return that claims the deduction without that reporting will face questions.

Caps, years, and the phaseout

The deduction is capped at $12,500 of qualified overtime per individual return, $25,000 on a joint return, per year, and it is available for tax years 2025 through 2028. It is available whether you itemise or take the standard deduction, which makes it unusually broad, but the cap binds quickly: a worker earning a $10 premium on 25 overtime hours a week for 50 weeks accumulates $12,500 of premium in a year and hits the cap exactly.

Above $150,000 of modified adjusted gross income, $300,000 on a joint return, the deduction phases out. The phaseout reduces the deduction gradually rather than removing it at a cliff edge, but a high earner with modest overtime may find the deduction largely gone. The calculator on this site models the cap and the phaseout for your figures; the IRS fact sheet FS-2026-13 is the current guidance to check before filing.

What does not change: FICA, withholding, and state tax

Social Security and Medicare taxes apply to overtime pay exactly as before. The deduction is an income tax deduction only, so the FICA lines on your paycheck do not move. Withholding also does not automatically stop: qualified overtime generally remains wages for withholding purposes, though for 2026 an employee may account for the expected deduction through an updated Form W-4. Without that step, the benefit arrives as a larger refund or a smaller balance due when the return is filed, not as a bigger paycheck during the year.

State tax is a separate question, and the overtime pay calculation itself is covered in the companion guide. The deduction is federal; states decide their own treatment, and many states do not conform to it, so overtime that is deductible federally may still be fully taxable by your state. Check your state rules rather than assuming the federal deduction flows through.

A worked year, cap included

A worker earns $25 an hour, works 10 overtime hours a week for 48 weeks, and is paid time and a half. The premium is $12.50 an hour, so qualified overtime for the year is 10 times 48 times $12.50, which is $6,000, comfortably under the $12,500 cap. At a 22% marginal federal rate, the deduction saves about $1,320 of federal tax, before any phaseout. The same worker at 20 overtime hours a week would accumulate $12,000, still under the cap; at 25 hours a week for 50 weeks they would hit $15,625 of premium and the deduction would be capped at $12,500, saving about $2,750 at 22%.

Those savings are real but modest beside the overtime earnings themselves, which is the honest framing: the law returns roughly a fifth of the premium in tax saved, not the whole premium, and not the whole overtime paycheck. Anyone selling it as tax-free overtime is selling something else.

Mistakes: the four overclaims

First, claiming the whole overtime paycheck instead of the premium half. Second, claiming overtime that was not FLSA-required, such as a purely contractual premium. Third, assuming FICA disappears: it does not. Fourth, assuming the deduction is permanent: it runs for tax years 2025 through 2028 under current law, and later legislation could extend, change, or end it. Keep the W-2 box 12 code TT figure, keep pay records showing the premium separately, and check current IRS guidance before filing, because guidance on a new deduction is updated frequently.

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