How the No Tax on Overtime deduction actually works
"No tax on overtime" is a good headline, but the real rule is narrower than it sounds. Signed into law in July 2025 as part of the One Big Beautiful Bill Act, it creates a new federal income-tax deduction (Internal Revenue Code section 225) for qualified overtime compensation. It applies to tax years 2025, 2026, 2027 and 2028, and then expires unless Congress extends it.
Three things trip most people up:
- Only the "half" is deductible. If you earn $20 an hour and get $30 for overtime, only the extra $10 per hour — the premium your employer pays above your regular rate — counts. The base $20 was always taxable and still is. That's why this calculator asks for your regular rate and overtime hours instead of your total overtime pay.
- It has to be overtime the federal Fair Labor Standards Act requires. That means hours over 40 in a workweek for a non-exempt (usually hourly) employee. Overtime that's only required by your state (like California's daily overtime after 8 hours), a union contract, or your employer's own policy doesn't qualify unless it also exceeds the federal 40-hour rule.
- It's a deduction, not a tax exemption. A deduction lowers the income you pay tax on. If you're in the 12% bracket, a $4,000 deduction saves you about $480. Social Security and Medicare (FICA) taxes still come out of every overtime dollar, and most states still tax the full amount.
The limits: $12,500 cap and the $150,000 phase-out
The most you can deduct is $12,500 per year, or $25,000 if you're married and file jointly. Because only the premium portion counts, hitting that cap takes a lot of overtime — at $25 an hour with time-and-a-half, the premium is $12.50 an hour, so you'd need 1,000 overtime hours in a year to reach $12,500.
The deduction also shrinks for higher earners. Once your modified adjusted gross income (MAGI) passes $150,000 ($300,000 married filing jointly), you lose $100 of deduction for every full $1,000 over the line. The IRS worksheet rounds the excess down to the nearest thousand. So a single filer with $160,500 of MAGI loses $1,000 of deduction; a single filer at $275,000 or more gets nothing.
MAGI for this purpose is basically the adjusted gross income on line 11 of your Form 1040, with a few rare foreign-income items added back. For most hourly workers, it's simply total income minus a few adjustments like IRA or student-loan interest deductions.
Who can claim it
- Hourly and other non-exempt employees who receive FLSA overtime.
- You must have a valid Social Security number (and so must your spouse on a joint return).
- If you're married, you must file jointly. Married filing separately is not eligible.
- You do not have to itemize. This is an "above-the-line" style deduction claimed on the new Schedule 1-A, so you can take it along with the standard deduction.
- Salaried exempt employees (most managers and professionals) generally don't qualify because they aren't owed FLSA overtime.
How to claim it on your return
You claim the deduction on Schedule 1-A (Form 1040), Part III. Your employer reports your qualified overtime compensation to you and the IRS: on 2026 and later W-2s it appears in Box 12 with code TT. For 2025, employers were allowed to use Box 14 or a separate statement, and the IRS said it would accept reasonable estimates if your employer didn't break it out. Tax software will ask for the code TT amount and do the phase-out math for you.
One more timing note: for 2025, employer withholding tables did not change, so most workers get the benefit as a bigger refund when they file in early 2026. For 2026, the IRS updated withholding procedures, so some of the benefit may show up in your paycheck instead.
Worked examples
Run your own numbers above — the calculator applies the actual bracket math instead of a flat rate.
Overtime vs. tips: can you take both?
Yes. The overtime deduction and the No Tax on Tips deduction are separate line items on Schedule 1-A with separate caps. A bartender who works overtime can claim up to $25,000 of qualified tips and up to $12,500 of overtime premium, subject to the same $150,000 / $300,000 income phase-out on each.
Frequently asked questions
Is overtime really tax-free now?
Not entirely. For 2025–2028 you can deduct the premium ("half") portion of federally required overtime — up to $12,500 ($25,000 joint) — from your federal taxable income. FICA still applies, and most states still tax it.
Does my employer stop withholding tax on my overtime?
For 2025, no. Withholding didn't change, so the benefit arrives as a larger refund. The IRS adjusted withholding for 2026, so some of it may show up in your paychecks going forward.
What is code TT on my W-2?
Starting with 2026 W-2s (the ones you get in January 2027), Box 12 code TT is your total qualified overtime compensation for the year. Enter that figure in your tax software.
My state requires daily overtime after 8 hours. Does that count?
Only the portion that's also required by federal law — hours over 40 in the workweek — counts. State-only overtime premium is excluded.
I'm paid a salary but get overtime. Do I qualify?
If you're a non-exempt salaried employee who is legally owed time-and-a-half for hours over 40, yes. If you're an exempt employee (no legal overtime), no.
Do I need to itemize?
No. The deduction goes on Schedule 1-A and reduces your income whether you itemize or take the standard deduction.
Does the deduction reduce Social Security or Medicare tax?
No. It's an income-tax deduction only. Your 7.65% FICA withholding on overtime doesn't change.
What if I'm married filing separately?
You're not eligible. Married taxpayers must file jointly to claim the deduction.