No Tax on Overtime: Complete Guide
What Is the No Tax on Overtime Deduction?
The One Big Beautiful Bill Act (P.L. 119-21), signed into law on July 4, 2025, created a new federal tax deduction for qualified overtime compensation. Under IRC §225, eligible workers can deduct the overtime premium portion of their pay — the extra 0.5x above their regular hourly rate — from their federal taxable income.
The idea of eliminating taxes on overtime pay was a central campaign promise during the 2024 presidential race. After months of legislative negotiation, the provision was included in the broader One Big Beautiful Bill Act alongside deductions for tips and benefits for seniors. The law applies retroactively to January 1, 2025 and is effective through the end of 2028.
A common misconception: "no tax on overtime" does not mean overtime is completely tax-free. The provision is a deduction, not an exemption. It reduces your federal taxable income by the overtime premium amount, which lowers your income tax bill. But payroll taxes (FICA) — Social Security and Medicare — still apply to every dollar of overtime pay. The deduction also does not affect state income taxes in most states.
This is a below-the-line deduction claimed on Schedule 1-A. You do not need to itemize to claim it — it is available whether you take the standard deduction or itemize. This deduction reduces your taxable income but does not reduce your AGI.
Who Qualifies?
To claim the overtime tax deduction, you must meet all of the following requirements:
- FLSA §7 covered employment — You must work in a job covered by the overtime provisions of the Fair Labor Standards Act. Salaried exempt employees are not eligible.
- W-2 employee — The deduction applies to wages reported on Form W-2. Self-employed workers and independent contractors (1099) are not eligible.
- Valid Social Security number — Required for claiming the deduction.
- Eligible filing status — Single, head of household, or married filing jointly. Married filing separately is not eligible.
Understanding FLSA §7 Coverage
The Fair Labor Standards Act §7 requires employers to pay overtime (at least 1.5x the regular rate) for hours worked beyond 40 in a workweek. Employees covered by this rule are called "non-exempt." The distinction between exempt and non-exempt depends on salary level, job duties, and how you are paid — not just your job title.
Workers who typically qualify:
- Hourly nurses, CNAs, and medical technicians (not salaried RN managers)
- Construction workers, electricians, and plumbers
- Factory and manufacturing workers
- Truck drivers paid hourly (some long-haul drivers have separate FLSA exemptions under §13(b)(1))
- Retail and warehouse workers
- Restaurant and hospitality staff (hourly positions)
- Police officers, firefighters, and EMTs (subject to FLSA §7(k) special rules)
Workers who do NOT qualify:
- Salaried exempt employees — Managers, executives, professionals, and administrative staff who meet the FLSA salary and duties tests are exempt from overtime rules and cannot claim this deduction
- Independent contractors (1099) — The deduction is only for W-2 employees
- Self-employed workers — Business owners and sole proprietors are not eligible
- MFS filers — If you file married filing separately, you cannot claim the deduction regardless of your job
- Workers without a valid SSN — An ITIN does not qualify
If you are unsure whether your position is FLSA-covered, check with your employer's HR department or review your job's classification. The Department of Labor also provides FLSA guidance on its website.
How Does It Work?
The 0.5x Premium Explained
Only the overtime premium portion is deductible — that's 0.5x your regular hourly rate. When you work overtime, you're paid 1.5x your rate: the first 1.0x is regular pay, and the extra 0.5x is the deductible premium.
Here's what that looks like on a paycheck: If your regular rate is $25/hour, your overtime rate is $37.50/hour (1.5x). For each overtime hour, $25.00 counts as regular pay and $12.50 is the overtime premium. Only that $12.50 per hour is eligible for the deduction — not the full $37.50.
This means the deductible amount is always one-third of your total overtime pay. If your paycheck shows $750 in total overtime pay for the week, the deductible premium is $250 (one-third of $750).
Annual Deduction Caps
| Filing Status | Maximum Deduction |
|---|---|
| Single | $12,500 |
| Head of Household | $12,500 |
| Married Filing Jointly | $25,000 |
| Married Filing Separately | Not Eligible |
For married filing jointly, the $25,000 cap is per return, not per spouse. If both spouses earn overtime, their combined deduction cannot exceed $25,000.
Income Phaseout
The deduction phases out for higher earners. It decreases by $100 for every $1,000 of MAGI over the phaseout threshold:
| Filing Status | Phaseout Starts | Deduction Fully Phased Out |
|---|---|---|
| Single / HoH | $150,000 | $275,000 |
| Married Filing Jointly | $300,000 | $550,000 |
For a breakdown at every income level, see the full phaseout chart with worked examples for single, HoH, and MFJ filers.
Example 1: No Phaseout
A single filer earns $25/hour, works 10 overtime hours per week for 50 weeks, with $80,000 MAGI:
- Overtime premium per hour: $25 × 0.5 = $12.50
- Weekly premium: $12.50 × 10 hours = $125
- Annual premium: $125 × 50 weeks = $6,250
- Cap check: $6,250 is under the $12,500 single cap
- Phaseout check: $80,000 MAGI is below $150,000 — no phaseout
- Deduction: $6,250
- Marginal tax rate: 22%
- Federal income tax savings: $6,250 × 22% = $1,375.00
Example 2: With Phaseout
A single filer earns $40/hour, works 5 overtime hours per week for 48 weeks, with $175,000 MAGI:
- Overtime premium per hour: $40 × 0.5 = $20
- Weekly premium: $20 × 5 hours = $100
- Annual premium: $100 × 48 weeks = $4,800
- Cap check: $4,800 is under the $12,500 single cap
- Phaseout: ($175,000 − $150,000) ÷ $1,000 × $100 = $2,500 reduction
- Deduction after phaseout: $4,800 − $2,500 = $2,300
- Marginal tax rate: 24%
- Federal income tax savings: $2,300 × 24% = $552.00
Without the phaseout, this worker would have saved $1,152 ($4,800 × 24%). The phaseout reduced the benefit by $600.
See the full mechanics guide with examples →
See the detailed rules and limits or learn how this applies to nurses and healthcare workers.
FICA Still Applies
The overtime deduction reduces your federal income tax only. You still owe full payroll taxes (FICA) on every dollar of overtime pay, including the premium portion. FICA consists of three components:
- Social Security: 6.2% on wages up to $176,100 (2025 wage base; source: SSA)
- Medicare: 1.45% on all wages with no cap
- Additional Medicare: 0.9% on wages above $200,000 (single/HoH) or $250,000 (MFJ); source: IRS Pub 15
The combined employee rate is 7.65% on most wages (6.2% + 1.45%).
Example: On $18,750 in total overtime pay (from the Example 1 scenario above), you still owe $1,162.50 in Social Security tax and $271.88 in Medicare tax — a total of $1,434.38 in FICA that the overtime deduction does not reduce.
This is why your actual take-home increase from the deduction is less than it might first appear. The deduction saves you income tax (in Example 1, $1,375), but you still pay $1,434.38 in FICA on the same overtime pay. Your employer also pays a matching 7.65% in FICA on your behalf.
If your total wages exceed the Social Security wage base ($176,100 in 2025), the 6.2% SS tax stops applying to wages above that threshold — but Medicare (1.45%) and Additional Medicare (0.9% over $200K/$250K) continue on all wages with no cap. Note: The calculator on this site uses a simplified flat 7.65% FICA rate for all income levels. For workers earning above the Social Security wage base, actual FICA owed may be lower than shown.
Key Dates
| Date | Event |
|---|---|
| July 4, 2025 | P.L. 119-21 signed into law |
| Tax Year 2025 | Transition year — IRS Notice 2025-62 provides guidance |
| Tax Year 2026+ | Employers report qualified OT via W-2 Box 12 code TT |
| Tax Year 2028 | Last year the deduction is available (unless renewed) |
2025 — the transition year: Because the law was signed mid-year and applies retroactively to January 1, 2025, employers were not required to separately track or report qualified overtime for 2025. The IRS issued Notice 2025-62, providing reporting relief for employers. Workers claiming the deduction for 2025 should use their pay stubs, employer statements, or the calculation methods described in IRS Notice 2025-69 to determine their qualified overtime compensation.
2026 and beyond: Starting with the 2026 tax year, employers are required to report qualified overtime compensation on your W-2 in Box 12 using code "TT." This makes claiming the deduction straightforward — the amount from Box 12 flows directly to Schedule 1-A.
How to Claim the Deduction
The overtime deduction is claimed on Schedule 1-A, Part III (Deduction for Qualified Overtime Compensation). This is a new schedule created specifically for the OBBBA deductions — it is separate from the existing Schedule 1.
For Tax Year 2025
Because employers were not required to separately report overtime for 2025, you will need to calculate your qualified overtime compensation yourself. The IRS provides three acceptable methods in Notice 2025-69:
- Use detailed pay stubs showing overtime hours and rates
- Request an employer statement or letter confirming your overtime compensation
- Apply the IRS-provided calculation methods from Notice 2025-69
For Tax Year 2026 and Beyond
Your employer will report your qualified overtime compensation in W-2 Box 12 using code "TT." Transfer this amount to Schedule 1-A, Part III. The phaseout is calculated on the schedule based on your MAGI.
Most major tax software (TurboTax, H&R Block, FreeTaxUSA) will handle this automatically when you import your W-2 — the software reads the Box 12 code TT amount and populates Schedule 1-A for you. If you file by hand, follow the line-by-line instructions on Schedule 1-A to apply the cap and calculate any phaseout reduction.
Common Mistakes to Avoid
- Deducting the full 1.5x instead of the 0.5x premium. Only the premium portion (one-third of total OT pay) is deductible. If you earned $15,000 in total overtime pay, your deduction is $5,000 — not $15,000.
- Filing married filing separately. MFS filers are not eligible for the deduction under any circumstances. If you and your spouse both earn overtime, filing jointly allows you to claim up to $25,000 combined.
- Assuming salaried exempt employees qualify. The deduction requires FLSA §7 covered employment. If you are classified as exempt from overtime (most salaried managers, professionals, and executives), you do not qualify — even if your employer voluntarily pays you extra for long hours.
- Forgetting that FICA still applies. The deduction only reduces federal income tax. You still owe the full 7.65% in Social Security and Medicare taxes on all overtime pay.
- Not keeping pay stubs for the 2025 transition year. Since employers were not required to report OT separately for 2025, your pay stubs are the primary documentation for your deduction. Keep them with your tax records.
State Taxes and the Overtime Deduction
The overtime deduction is a federal deduction only. Whether it reduces your state income tax depends on your state's conformity with federal tax law.
No state income tax on wages (full federal benefit): Alaska, Florida, Nevada, New Hampshire (wages only), South Dakota, Tennessee, Texas, Washington, and Wyoming. Workers in these states benefit fully because there is no state income tax to worry about.
States that conform to the federal overtime deduction (as of early 2026, per ITEP and Tax Foundation): Idaho, Iowa, Michigan, Montana, North Dakota, Oregon, and South Carolina. Workers in these states may get both a federal and state tax reduction. Michigan is the only state that actively chose to adopt the overtime and tips deductions while decoupling from other OBBBA business provisions.
States that have decoupled or declined:
- Colorado — decoupled from the overtime deduction specifically (but kept the tips deduction), saving an estimated $119M–$200M in state revenue
- Maine — the governor directed the state tax agency not to conform to the tips or overtime deductions
- Washington, D.C. — fully decoupled from both the tips and overtime deductions
- New York — requires addback of the federal tip and overtime deduction on state returns
Most states are still undecided or in the legislative process — many state legislatures are weighing the revenue impact of conforming to the federal deduction. Check with your state tax agency or a local tax professional for the latest guidance on whether your state has adopted, decoupled from, or is still considering the overtime deduction.
State-specific impacts: California, Texas, New York, Florida.
About the Law
The No Tax on Overtime deduction is part of the One Big Beautiful Bill Act (OBBBA), also informally referred to as the "Working Families Tax Cut" in some media coverage. The official title of the law is the One Big Beautiful Bill Act, designated as P.L. 119-21.
In addition to the overtime deduction, the OBBBA created several other tax benefits for workers:
- Tips deduction (IRC §224) — Up to $25,000/year for qualifying tipped workers. See the No Tax on Tips guide.
- Senior bonus deduction — An additional $6,000 deduction for taxpayers age 65 and older (2025-2028).
- Car loan interest deduction — Up to $10,000/year in interest on auto loans for American-made vehicles.
All of these provisions, including the overtime deduction, sunset after the 2028 tax year unless Congress extends or renews them. The law amends the Internal Revenue Code by adding §225 for overtime and §224 for tips. Whether these provisions will be extended beyond 2028 depends on future legislation — workers should plan around the current four-year window and adjust if the law changes.
Frequently Asked Questions
What is the No Tax on Overtime deduction?
It is a federal income tax deduction for the overtime premium portion of your pay (0.5x your hourly rate for hours over 40/week). Created by the One Big Beautiful Bill Act (P.L. 119-21), signed July 4, 2025. Effective for tax years 2025-2028.
How much can I deduct for overtime?
Up to $12,500 per year if you file as single or head of household, or $25,000 if married filing jointly. The deduction phases out starting at $150,000 MAGI (single/HoH) or $300,000 (MFJ).
Who qualifies for the overtime tax deduction?
W-2 employees in FLSA §7 covered positions with a valid SSN. You must file as single, head of household, or married filing jointly. Salaried exempt employees and MFS filers are not eligible.
Does the overtime deduction reduce FICA taxes?
No. The deduction only reduces federal income tax. You still owe Social Security (6.2%) and Medicare (1.45%) on all overtime pay.
When does the No Tax on Overtime deduction expire?
The deduction is effective for tax years 2025 through 2028. It expires after the 2028 tax year unless Congress extends the provision.
Can I claim both the overtime and tips deduction?
Yes. If you qualify for both, you can claim the overtime deduction (up to $12,500/$25,000) and the tips deduction (up to $25,000) in the same tax year. They are separate deductions under IRC §225 and IRC §224, each with its own cap and phaseout. See the No Tax on Tips guide for details.
Does my employer need to do anything?
For tax year 2025, no — employers are not required to separately report qualified overtime (IRS Notice 2025-62). Use your pay stubs or employer statements to calculate your deduction. Starting in 2026, employers report qualified overtime compensation on your W-2 in Box 12 using code "TT."
What if I work two jobs?
FLSA overtime is calculated per employer — you must work over 40 hours in a week with a single employer to trigger overtime. If you work 30 hours at each of two jobs, neither triggers FLSA overtime and there is no qualifying premium to deduct. If you work 50 hours at one job, the 10 hours of OT premium from that employer qualifies. Overtime from multiple FLSA-covered employers can each qualify separately, subject to the annual cap.
Does double-time pay qualify?
Only the FLSA-required 0.5x premium portion qualifies — not the extra pay above that. If your employer pays double-time (2.0x your regular rate), you can deduct only 0.5x of your regular rate, the same amount as standard time-and-a-half. The additional 0.5x above the FLSA minimum is not deductible. (IRS Notice 2025-69, Example 3)
Can I claim the deduction for comp time paid out?
Yes. When compensatory time is paid out as cash wages, one-third of the payment counts as qualified overtime compensation. The deduction applies in the year the comp time is paid, not the year it was earned. For example, if you receive $4,500 in comp time wages, you can claim $1,500 as qualified overtime compensation. (IRS Notice 2025-69, Example 6)