No tax on overtime: what the $12,500 deduction covers

No tax on overtime covers only the premium portion

Overtime is not tax free under the 2025 law. If you work 10 extra hours at time-and-a-half, the first 1.0 times your regular rate is ordinary wages and stays fully taxable. Only the extra 0.5 times your rate, the premium the Fair Labor Standards Act requires for hours over 40 in a workweek, is eligible for the overtime deduction.

That means the deductible amount is one third of your total time-and-a-half overtime pay. If your employer pays double time for hours that the FLSA only requires at time-and-a-half, the deductible part is still the FLSA half-rate premium, which works out to one quarter of the double-time pay.

Worked example: hourly worker at $30 an hour

A single warehouse worker earns $30 an hour and works 400 overtime hours in 2026, paid at $45 an hour, for $18,000 of overtime pay. The premium is $15 times 400 hours, or $6,000, the same as $18,000 divided by 3. With $78,000 of AGI, taxable income after the $16,100 standard deduction is $61,900, all of the top slice in the 22% bracket. Deducting $6,000 saves about $1,320 of federal income tax.

Overtime deduction limits and income phaseout

Unlike the tips deduction, the overtime cap doubles for married couples filing jointly. Each spouse's premium pay is added together and the combined total is limited to $25,000.

The phaseout is figured on Schedule 1-A Part III. Subtract $150,000 ($300,000 joint) from modified AGI, divide by $1,000, drop the fraction and multiply by $100. A single nurse with $12,500 of premium pay and $190,000 of modified AGI loses $4,000 (40 times $100), so the deduction is $8,500. The single cap is gone entirely at $275,000; the joint cap at $550,000.

Who qualifies under the no tax on overtime rules

The deduction follows federal wage law, not your employer's pay policy. You generally qualify if you are a non-exempt worker covered by the FLSA and were paid at least time-and-a-half for hours over 40 in a workweek.

• Counts: the half-rate premium on FLSA-required overtime, whether you are paid hourly or salaried non-exempt.
• Does not count: overtime paid under a state law or union contract that the FLSA does not require, such as daily overtime after 8 hours in a week with 40 or fewer total hours.
• Does not count: the straight-time part of overtime pay, holiday or weekend premiums that are not FLSA overtime, and overtime paid to exempt salaried employees.
• Filing rules: the worker needs a valid Social Security number, and married couples must file jointly.

How to claim the overtime tax deduction 2026 on Schedule 1-A

For tax year 2026, employers must report qualified overtime compensation separately, so most workers can copy the number rather than work it out from pay stubs.

1. Find qualified overtime on Form W-2 box 12 with code TT. Contract workers look at Form 1099-NEC box 1d or Form 1099-MISC box 14.
2. Enter the total on Schedule 1-A line 14, then take the smaller of that figure or $12,500 ($25,000 joint).
3. Use modified AGI from Part I to apply the $100 per $1,000 reduction.
4. Carry the Part III result to Part VI, which adds all Schedule 1-A deductions and moves the total to Form 1040.

If box 12 shows total overtime rather than the premium, or no code TT at all, ask your payroll department for a corrected W-2. Keeping pay stubs that show regular and overtime hours lets you check the figure with the divide-by-3 method. For a line-by-line walkthrough, use our overtime deduction calculator.

Lower withholding during the year

You can give your employer a new Form W-4 and list your expected overtime deduction in Step 4(b). Withholding then drops each payday instead of the benefit arriving as a refund in 2027.

Why overtime can still feel heavily taxed

Paychecks with overtime often show high withholding because payroll software treats the larger check as if you earned that much every period. The deduction does not change Social Security or Medicare tax either: 7.65% still comes out of every overtime dollar. Our does overtime get taxed more page explains the withholding effect.

Workers who earn both overtime and tips can claim both deductions when they meet each set of rules, since the caps are separate. The tipped occupations list shows which jobs qualify for tips, and the One Big Beautiful Bill tax changes hub compares all four new deductions.