No Tax on Overtime: How the Deduction Works, With Examples by Wage

For tax years 2025 through 2028, hourly workers who earn overtime can deduct part of it from their federal taxable income. The provision, created by the One Big Beautiful Bill Act and widely called "no tax on overtime," is narrower than its nickname: it covers only the overtime premium — not the full overtime paycheck — and it applies to federal income tax only.

This guide explains exactly what counts, how much you can deduct, how it shows up on your W-2 and tax return, and what it's worth at different wages. A $25-an-hour worker with five hours of overtime a week, for instance, deducts $3,250 and saves about $390 in federal income tax for 2026. Every figure here comes from the same engine as our overtime calculator, which applies the deduction automatically.

What changed in 2025

Before 2025, overtime was simply wages: taxed at your regular brackets like any other pay. That's still the starting point. What the new law adds is a deduction for qualified overtime compensation, available whether or not you itemize, that lowers federal taxable income at filing. Because it's a deduction, its value depends on your bracket — 10, 12, 22 or 24 cents per dollar deducted for most hourly workers.

Social Security and Medicare still apply to every overtime dollar, as does state income tax in states that tax wages. Federal income tax is still withheld from overtime paychecks as usual. The IRS issued guidance on the deduction in January 2026 and updated it in August 2026, clarifying that it's a deduction, not an exemption, and how it's documented.

What counts as qualified overtime

Qualified overtime compensation is the premium required by the Fair Labor Standards Act — the federal law that requires non-exempt employees to be paid at least 1.5 times their regular rate for hours over 40 in a workweek. The deductible part is the extra half: if your regular rate is $24 and you're paid $36 for an overtime hour, the qualified portion is $12. The base $24 for that hour is ordinary wages.

Premiums that go beyond the federal requirement don't qualify. The second half of double time, daily overtime required only by state law (such as California's rule after eight hours in a day), and overtime paid under a union contract above what the FLSA requires are all excluded from the deduction, even though they're real overtime pay. Overtime earned by workers who are exempt from the FLSA — for example, salaried employees who receive extra pay for long weeks — isn't qualified overtime either.

The cap and the phase-out

The deduction is capped at $12,500 per return, or $25,000 for married couples filing jointly. Most hourly workers never reach the cap: a $25-an-hour worker would need about 1,000 overtime hours a year to generate $12,500 of qualified premium. It mainly binds for high-wage workers with heavy, sustained overtime.

The cap shrinks by $100 for every $1,000 of modified adjusted gross income above $150,000 ($300,000 for joint filers). At $180,000 of income, a single filer's cap is $9,500. As with the tips deduction, the phase-out lowers the maximum rather than reducing the premium itself, so if your qualified overtime is below the reduced cap, you still deduct all of it. Married couples generally must file jointly to claim the deduction.

Savings by wage

The table shows the qualified premium and federal income tax saved for single filers working year-round at several hourly wages, with five and ten hours of overtime a week. It also shows what each overtime hour nets after federal income tax and FICA once the deduction is counted, in a state with no income tax. Notice that each overtime hour nets more than the regular hourly wage at every level — overtime remains the best-paid work you do.

Calculate your own overtime after taxes →

What still gets taxed

Three things are unchanged. Social Security (6.2%) and Medicare (1.45%) apply to the full overtime pay, not just the base. State income tax applies to overtime in every state that taxes wages, unless the state has passed its own exemption. And federal income tax is still withheld from each paycheck, which is why overtime-heavy checks can look over-taxed: payroll systems annualize each check, and the deduction isn't applied until you file.

How it shows up: W-2 code TT and the W-4

Starting with the 2026 tax year, employers must report qualified overtime compensation separately on the W-2, in box 12 with code TT. For 2026 and later, the IRS says employees can generally deduct only qualified overtime that's reported this way, so it's worth checking your W-2 in January and asking payroll about any amount that looks wrong. For the 2025 tax year, transition relief allowed workers to determine the amount from pay records when employers didn't report it separately.

If you'd rather see the benefit in your paychecks than in a refund, the 2026 Form W-4 lets you account for an expected overtime deduction in Step 4(b), reducing withholding. Estimate conservatively: overtime is often seasonal, and over-estimating the deduction can leave you owing at filing.

Exempt vs. non-exempt: who earns qualified overtime

Only non-exempt employees are owed FLSA overtime, so only they earn qualified overtime. Most hourly workers are non-exempt. Salaried employees are exempt only if they meet both a salary threshold and a duties test — executive, administrative, professional, computer or outside sales work. Job titles don't decide it; actual duties do. A salaried employee who is actually non-exempt and paid overtime earns qualified overtime like any hourly worker, while independent contractors aren't covered by FLSA overtime at all.

Worked examples

A warehouse associate earning $20 an hour who averages eight overtime hours a week earns $12,480 in overtime for the year, of which $4,160 is qualified premium. The deduction saves about $499 of federal income tax, and each overtime hour nets about $25.30 after federal taxes and FICA.

An hourly nurse earning $45 an hour with six overtime hours a week earns $21,060 in overtime and deducts $7,020, saving about $1,544 — more than the warehouse associate, because each deducted dollar comes off income in a higher bracket.

A married couple filing jointly — one earning $28 an hour with six overtime hours a week, the other $24 with four — combine their qualified premiums of $6,864 under the $25,000 joint cap, saving about $824 together.

How the regular rate is calculated

The premium depends on your "regular rate," which isn't always your base wage. Under the FLSA, the regular rate includes shift differentials and most nondiscretionary bonuses — production bonuses, attendance bonuses and the like. A worker earning $20 an hour plus a $2 night differential has a regular rate of $22, so an overtime hour pays $33.00 and the qualified premium is $11.00, not $10.00.

Overtime is also counted per workweek, not averaged. Fifty hours one week and thirty the next means ten overtime hours, even though the two-week average is forty. Employers that get either rule wrong underpay both the overtime and, now, the deductible premium — so it's worth checking your pay stub's overtime rate against your base rate plus any differentials.

Calculate overtime at a $22 regular rate →

State overtime rules

Several states require more overtime than federal law. California pays overtime after eight hours in a day and double time after twelve; Alaska, Nevada and Colorado also have daily overtime rules. Those state-required amounts are real overtime pay, but only the portion that federal law would have required counts as qualified overtime for the deduction. In practice that means a California worker with long days but a forty-hour week may earn state overtime that isn't deductible at all.

Overtime, retirement and benefits

In most 401(k) plans, overtime counts as eligible compensation, so a percentage contribution automatically saves more in overtime-heavy periods and can capture more employer match. Overtime also counts toward your Social Security earnings record, which can raise future benefits. Those effects are unchanged by the deduction — they're worth remembering when deciding whether extra hours are worth it.

Common mistakes

Assuming all overtime pay is deductible is the most common one; only the premium counts. Close behind: expecting bigger paychecks automatically, when the benefit normally arrives at filing; counting state-only or double-time premiums that federal law doesn't require; forgetting that Social Security, Medicare and state tax still apply; and over-estimating the deduction on a W-4 in a year when overtime later dries up, which can turn an expected refund into a balance due.

Planning a year with overtime

Because overtime is often seasonal, the safest budget is built on base pay, with overtime directed to specific goals — a debt payoff, an emergency fund, a down payment. Under the new rules, part of the tax on that overtime comes back at filing, so a heavy-overtime year often ends with a larger refund. Decide in advance where that refund goes, and you'll turn a busy season into a measurable step forward.

Put your overtime toward a savings goal →

How much overtime it takes to hit the cap

The $12,500 cap applies to the premium, not to total overtime pay, so reaching it takes a lot of overtime. The table shows the overtime hours a single filer would need in a year to generate $12,500 of qualified premium at different regular rates. At $25 an hour, that's 1,000 hours — about 19 hours of overtime every week of the year. For most hourly workers the cap never comes into play; it matters mainly for high-wage workers with sustained heavy overtime, such as some nurses, linemen and skilled trades.

Overtime vs. a raise

Under the new rules, overtime is taxed slightly less than other pay, which changes the comparison between extra hours and a raise. For a $25-an-hour worker, five overtime hours a week adds $9,750 of gross pay a year, and the deduction returns about $390 of federal tax at filing. A raise of the same gross amount gets no deduction at all. The trade-off is time: the raise arrives without the extra 260 hours a year. If the hours are available and sustainable, overtime is among the highest-paid work you can do; if they cost health, family time or the energy to pursue a promotion, the raise is worth more than the arithmetic suggests.

A checklist before you file

Before filing, confirm four things. First, that your W-2 shows qualified overtime in box 12 with code TT, and that the amount looks like half your regular rate times your overtime hours. Second, that the figure excludes any double-time or state-only premiums, which don't qualify. Third, that your modified adjusted gross income is below $150,000 ($300,000 joint) — or, if it's above, that you've applied the reduced cap. And fourth, if you're married, that you're filing jointly. Tax software asks for the box 12 amount and applies the cap and phase-out, but the input has to be right for the result to be.

Keep your final pay stub of the year with the W-2. Its year-to-date overtime figures are the easiest way to check the reported premium, and they're what you'll need if you ever have to show how the deduction was calculated.

Who doesn't qualify

Exempt salaried employees, independent contractors, and workers whose extra pay isn't FLSA-required overtime don't have qualified overtime. Neither do workers in a few industries with special FLSA overtime rules where no premium is legally required for certain hours. Married individuals who file separately generally can't claim the deduction. And for 2026 onward, overtime that your employer doesn't report on your W-2 generally can't be claimed, so missing reporting is worth fixing with payroll rather than ignoring.

Calculate your overtime after taxes

The overtime calculator applies the deduction by default — enter your hourly rate, overtime hours, state and filing status to see weekly pay, yearly overtime, and what each overtime hour nets. Switch the deduction off to compare. To see the effect on your refund, use the tax refund estimator with your overtime premium and withholding.