“No tax on overtime” is a nickname, not a literal exemption. Your overtime is still taxable wages. The law created a deduction of up to $12,500 in qualified overtime compensation per return, or $25,000 on a joint return, which shrinks once modified adjusted gross income (MAGI) passes $150,000 ($300,000 for joint filers). It applies to tax years 2025 through 2028.
The deduction comes from the One Big Beautiful Bill Act (Public Law 119-21) and is codified as section 225 of the Internal Revenue Code. This guide reflects IRS Fact Sheet FS-2026-13, updated in August 2026.
Quick facts
| Item | Rule |
|---|---|
| Deduction limit | $12,500 (single or head of household); $25,000 (married filing jointly) |
| Income phaseout | Starts at $150,000 MAGI ($300,000 joint) |
| Tax years | 2025 through 2028 |
| What qualifies | Only the overtime premium required by the Fair Labor Standards Act (FLSA) |
| Form to claim it | Schedule 1-A, attached to Form 1040 |
| Where it’s reported | Form W-2, box 12, code TT (required from 2026) |
| Itemizing required? | No |
Is Overtime Pay Still Taxable?
Yes. The deduction does not exclude overtime from gross income, and overtime generally stays subject to income tax withholding, Social Security, and federal unemployment taxes. You still owe your share of FICA taxes, which is 6.2% for Social Security and 1.45% for Medicare, on every dollar of overtime.
There is also no special “overtime tax rate.” Overtime is taxed as ordinary income at your marginal rate. A big overtime check can look heavily taxed because payroll systems estimate withholding as if you’d earn that amount all year. Your actual tax is settled on your return, and that’s where the deduction helps. State tax treatment varies, so check your state revenue department.
How Does the Deduction Work, Step by Step?
The deduction lowers your taxable income, not your paycheck. The process runs in this order:
- Your employer calculates the premium each workweek. For most employees, it’s the FLSA hours over 40 in a workweek, multiplied by one-half of the regular rate.
- The total appears on your W-2. Starting in 2026, it goes in box 12 under code TT. This figure can be larger than what you can deduct.
- You enter the code TT amount on Schedule 1-A. The form then applies the dollar cap and the income phaseout.
- The result carries to Form 1040. It reduces taxable income, and it sits below adjusted gross income (AGI).
What Counts as Qualified Overtime Compensation?
Only the “half” in time and a half counts. If you earn $20 an hour and work 10 overtime hours, you’re paid $300 for that time. The $200 straight-time portion isn’t deductible. The $100 overtime premium is.
The premium must also be required by federal law. Extra overtime pay from your employer, a state law, or a union contract does not count beyond the amount the FLSA minimally requires. The IRS gives a clear example: a worker at $20 an hour paid double time for 10 overtime hours receives $400, but only $100 qualifies.
| Pay situation | Deductible? |
|---|---|
| Time and a half after 40 hours in a workweek | Yes, the premium half |
| Double time | Only the FLSA-required half |
| Daily overtime under state law (under 40 weekly hours) | No |
| Weekend or holiday premium not required by the FLSA | No |
| Salaried exempt manager or professional | No |
| Straight-time portion of overtime hours | No |
The regular rate isn’t always your base wage. Under the FLSA, it includes most non-discretionary pay, such as shift differentials, so your qualified premium can be higher than your base rate suggests.
Who Qualifies for the Overtime Tax Deduction?
You generally need to meet all of these conditions:
- You’re an FLSA overtime-eligible employee. Executive, administrative, and professional employees, outside sales staff, and certain motor carrier, agricultural, and seasonal employees are common exemptions. An owner with at least a 20% stake who actively manages the business is generally treated as exempt.
- You have a valid Social Security number. It must be valid for employment and issued before your return’s due date, including extensions.
- You file jointly if married. A married employee must file a joint return to claim the deduction. Married filing separately is out.
- Your income isn’t too high. The MAGI phaseout can reduce the deduction to zero.
Independent contractors rarely qualify. The IRS notes that overtime reported on Form 1099-NEC (box 1d) or Form 1099-MISC (box 14) is uncommon and arises when a worker is an FLSA employee but is treated as a contractor for tax purposes. Federal employees follow Office of Personnel Management rules, and territory residents may face added limits.
How Much Can You Deduct, and What Is the Income Limit?
The phaseout subtracts $100 for every $1,000 of MAGI above the threshold. MAGI is your AGI with certain foreign and territory income exclusions added back. These are the levels at which a maximum deduction would disappear entirely, based on that formula:
| Filing status | Maximum deduction | Phaseout begins | Fully phased out (at maximum) |
|---|---|---|---|
| Single / head of household | $12,500 | $150,000 | about $275,000 |
| Married filing jointly | $25,000 | $300,000 | about $550,000 |
If your qualified overtime is well below the cap, you’ll lose it sooner. The Schedule 1-A worksheet handles the exact rounding.
When Does It Start and End?
The deduction covers tax years 2025 through 2028, so the overtime deduction 2026, 2027, and 2028 rules mirror 2025 unless Congress changes them. Overtime paid in 2025 is claimed on the return filed in 2026.
The 2025 filing season was a transition year. Notice 2025-69 let workers use a reasonable method to figure their qualified overtime, because employers weren’t required to report it separately. That relief ended for 2026. You can only consider the amount your employer reported in box 12, code TT. If you didn’t claim it for 2025, you may be able to amend the return. Confirm the deadline on IRS.gov or with a tax professional.
How Do You Claim It?
- Check Form W-2, box 12, code TT. Confirm it looks right against your pay records.
- Complete Schedule 1-A, Part III, starting with the full code TT amount.
- Let the form apply the cap and phaseout.
- Carry the result to Form 1040.
You don’t need to itemize. The deduction is available whether you itemize or take the standard deduction.
If the W-2 is wrong, ask your employer for a corrected Form W-2c. A substitute W-2 on Form 4852 can’t be used for this deduction, and an unreported amount can’t be claimed. Since 2026 wages are already being paid, keep your own hours and pay records now so you can spot errors in January.
To see the benefit sooner, adjust your withholding. Employers can’t reduce withholding for the deduction unless you submit a new Form W-4. The 2026 W-4 has a place for it in step 4(b), and the IRS Tax Withholding Estimator accounts for it.
Overtime Deduction Examples
Example 1: Single hourly worker. Maria earns $22 an hour and works 5 overtime hours a week for 50 weeks. Her premium is 5 × $11 × 50 = $2,750. Her MAGI is well under $150,000, so she deducts $2,750. At a 12% marginal rate, that saves about $330.
Example 2: Married couple. Two spouses have code TT amounts of $9,000 and $6,000, and MAGI of $180,000. The $15,000 total is under the $25,000 cap and their income is under $300,000. They deduct $15,000, which saves about $3,300 at 22%.
Example 3: Phaseout. A single filer has $10,000 in code TT and $170,000 in MAGI. That’s $20,000 over the threshold, so the deduction falls by $2,000 to $8,000. At 24%, the savings are about $1,920.
To estimate your own, multiply your marginal rate by your deductible amount. Your refund will also depend on how much tax was withheld during the year.
What About No Tax on Tips?
The same law created a separate deduction for qualified tips, up to $25,000, for workers in occupations that customarily received tips. The income phaseout levels are the same, and employers report the amount with code TP. If you earn both tips and qualified overtime, you may be able to claim both.
FAQ Section
How does no tax on overtime work for 2025?
For 2025, eligible workers deduct up to $12,500 ($25,000 if married filing jointly) of qualified overtime compensation, meaning the premium portion of FLSA-required overtime, on Schedule 1-A of their 2025 Form 1040. Because employers weren’t required to report the figure separately on 2025 Forms W-2, IRS Notice 2025-69 let workers use a reasonable method based on their pay records.
How will no tax on overtime work in 2026?
The caps and phaseouts stay the same, but the paperwork is stricter. Employers must report qualified overtime in box 12 of Form W-2 with code TT, and you can deduct only the amount reported there. You claim it on Schedule 1-A when you file in 2027.
Is there a no tax on overtime calculator?
You can estimate the deduction by hand. Multiply overtime hours over 40 in each workweek by half of your regular hourly rate, add up the year, then apply the $12,500 ($25,000 joint) cap and the MAGI phaseout. The IRS Tax Withholding Estimator has also been updated to account for the deduction.
How does an overtime tax calculator work?
Overtime is taxed like other wages, with no special rate. A paycheck calculator applies federal income tax withholding based on your Form W-4, plus 6.2% Social Security and 1.45% Medicare tax. Your final tax is settled on your return, where the overtime deduction may lower your taxable income.
What is the no tax on overtime income limit?
The deduction starts shrinking when MAGI exceeds $150,000, or $300,000 on a joint return, and falls by $100 for every $1,000 above the threshold. At the maximum deduction, it disappears at roughly $275,000 for single filers and $550,000 for joint filers.
How do I estimate my overtime tax refund?
Multiply your deductible amount by your marginal tax rate. A $3,000 deduction at 22% lowers your tax by about $660. Whether it shows up as a bigger refund depends on your withholding, because employers can’t reduce withholding for the deduction unless you file a new Form W-4.
When does no tax on overtime start?
It applies to tax years 2025 through 2028. The 2025 deduction is claimed on the return filed in 2026, and the 2026 deduction on the return filed in 2027. Unless Congress extends it, the deduction ends after tax year 2028.
What is no tax on tips?
It’s a separate deduction from the same law. It allows up to $25,000 of qualified tips for workers in occupations that customarily received tips. It has the same income phaseout levels and is reported with W-2 box 12, code TP. Workers who qualify for both may claim both deductions.
Author Bio: Hamid Ali writes clear, practical guides on U.S. tax rules, payroll, and workplace pay for everyday workers. His articles are based on official sources such as the IRS and the U.S. Department of Labor, and he updates them as new guidance is released.
Author Name: Hamid Ali
Email: johanharwen314@gmail.com
Author Name: Hamid Ali
Email: johanharwen314@gmail.com
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