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Last reviewed: July 31, 2026
No, overtime is not tax-free, but a new federal deduction lets eligible workers write off up to $12,500 of overtime pay ($25,000 if married filing jointly) for tax years 2025 through 2028. The deduction covers only the premium "half" of your time-and-a-half, not the whole overtime check. Social Security and Medicare tax still come out of every overtime dollar. You claim it on the new Schedule 1-A, whether or not you itemize.
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Overtime is not tax-free. The One Big Beautiful Bill Act (OBBBA) created a deduction for qualified overtime, not an exemption, in new Internal Revenue Code Section 225. A deduction lowers the income your tax is calculated on; an exemption would remove the income entirely. Your overtime still shows up as wages, you still pay Social Security and Medicare on it, and it still counts toward your adjusted gross income. Eligible workers simply subtract the qualifying part before the income-tax brackets apply. The name oversells it: "no tax on overtime" really means no federal income tax on the premium portion of FLSA overtime, up to a cap, through 2028.
The maximum deduction is $12,500 for single filers and $25,000 for married couples filing jointly, per the IRS overtime deduction guidance. Both figures apply to tax years beginning after December 31, 2024 and before January 1, 2029, meaning 2025, 2026, 2027, and 2028. Unless Congress extends it, overtime returns to full income taxation in 2029.
Two requirements gate the deduction before any dollar figure matters:
The deduction is available whether you itemize or take the standard deduction, so a typical hourly worker who uses the $16,100 standard deduction (2026, single) still gets it on top.
Qualified overtime compensation is only the amount that exceeds your regular rate of pay, not the full time-and-a-half. IRS Notice 2025-69 defines it as the "half" portion of the "one and one-half times" rate that the Fair Labor Standards Act minimally requires. When you earn time-and-a-half, the base-rate portion is ordinary wages; only the extra premium on top is deductible.
Consider Rashid, a single machinist who earns a straight $30 an hour. His FLSA overtime rate is $45 an hour, so the deductible premium is $15 an hour ($45 minus his $30 regular rate). He works 500 overtime hours in 2026:
| Item | Amount |
|---|---|
| Base hourly (regular) rate | $30 |
| Overtime rate (time-and-a-half) | $45 |
| Deductible premium per overtime hour | $15 |
| Overtime hours worked in 2026 | 500 |
| Total overtime pay | $22,500 |
| Regular-rate portion (NOT deductible) | $15,000 |
| Qualified overtime deduction | $7,500 |
| Federal income tax saved (22% bracket) | $1,650 |
Rashid's overtime paychecks totaled $22,500, but only the $7,500 premium is deductible. At his 22% marginal rate, that saves about $1,650 in federal income tax. Note how far he is from the $12,500 single cap: to max it out at a $15 premium, a worker would need roughly 833 overtime hours in a year, about 16 hours of overtime every week. Most hourly workers deduct a few thousand dollars, not the full cap.
This example assumes a flat $30 regular rate. The FLSA "regular rate" can be higher when it includes nondiscretionary bonuses or shift differentials, which raises the premium too, so your pay stub or W-2 is the source of truth for the actual figure.
Interactive
How much of your overtime is deductible?
Enter your FLSA overtime premium, filing status, and income to see your deduction after the cap and phase-out.
Only the FLSA 'half' — 2026 W-2 Box 12, code TT — not your full overtime check.
Household income if filing jointly.
Your overtime deduction
$14,000
Claimed in Part III of Schedule 1-A whether or not you itemize. It lowers federal income tax only — Social Security and Medicare still come out of every overtime dollar.
Counts FLSA-required premium only — daily overtime, double-time, and above-FLSA union premiums don't qualify. For 2025 there is no W-2 code TT breakout, so compute the premium from pay stubs. Phase-out applied at $100 per $1,000 of MAGI over the threshold.
Model your take-home payThe deduction is for workers who are owed overtime under the Fair Labor Standards Act: hourly, non-exempt employees who receive time-and-a-half for hours over 40 in a workweek. If your employer pays you FLSA overtime, the premium qualifies. If your overtime comes from somewhere other than the FLSA, it does not.
Employees classified as exempt from FLSA overtime, most salaried professional, executive, and administrative staff, do not receive FLSA overtime and therefore have no qualified overtime to deduct. Being paid extra for long hours is not the test. The test is whether the pay is overtime "required under section 7 of the FLSA." Exempt workers fail that test even when they work well past 40 hours.
A true independent contractor is not covered by the FLSA and is not owed overtime, so contract work generates no qualified overtime compensation no matter how many hours it runs. Schedule 1-A does carry a line for overtime reported on Form 1099-NEC or 1099-MISC (line 14b), but it exists for narrow situations, chiefly workers paid as contractors who legally should have been treated as FLSA-covered employees. If you are self-employed and want to lower your tax, the levers are business deductions and the self-employment tax mechanics, not this deduction.
Only FLSA-required overtime qualifies. Overtime that is more generous than federal law does not, even though it lands on the same pay stub:
The premium on these hours is real money, but it is not deductible qualified overtime. Only the portion the FLSA minimally requires ("half" of time-and-a-half on hours past 40 in a week) counts.
The deduction shrinks for higher earners. It begins phasing out at $150,000 of modified adjusted gross income (MAGI) for single filers and $300,000 for joint filers, dropping $100 for every $1,000 of MAGI over the threshold.
| Filing status | Full deduction below | Phase-out begins | Fully phased out at |
|---|---|---|---|
| Single | $150,000 MAGI | $150,000 | $275,000 |
| Married filing jointly | $300,000 MAGI | $300,000 | $550,000 |
Worked example (joint filers). Darnell is a lineman whose storm-season overtime is heavy, and his spouse Freya works too. Their combined MAGI is $320,000, which is $20,000 over the $300,000 joint threshold. The reduction is $20,000 ÷ $1,000 × $100 = $2,000. If Darnell's qualified overtime premium for the year is $16,000, their deduction is $16,000 − $2,000 = $14,000. A single filer's deduction disappears completely once MAGI reaches $275,000, and a joint filer's at $550,000.
The overtime deduction lowers federal income tax only. Social Security tax (6.2% employee share) and Medicare tax (1.45%) still apply to every overtime dollar, including the premium you deduct. Your employer also still withholds federal income tax from overtime during the year, because the deduction is claimed at filing, not applied to your paycheck automatically.
That timing has a practical effect. Because withholding does not shrink when the deduction does its work, an eligible worker with steady overtime may be over-withheld and see the benefit as a larger refund. If you would rather keep the money each pay period, you can reduce withholding by updating Form W-4, and the take-home pay calculator shows how a change flows through to each check. Adjust carefully: overshoot and you can owe at filing.
Reporting works differently in the first year than going forward. For 2025, the IRS granted transition relief: employers are not required to report qualified overtime separately on Forms W-2, 1099-NEC, or 1099-MISC. Workers calculate the amount from their pay records using the Schedule 1-A instructions. For 2026, separate W-2 reporting becomes mandatory.
| Tax year 2025 (filed early 2026) | Tax year 2026 (filed early 2027) | |
|---|---|---|
| W-2 reporting of overtime | Not required separately (transition relief) | Box 12, code TT (mandatory) |
| How you find the amount | Pay stubs plus the Schedule 1-A instructions worksheet | W-2 Box 12, code TT |
| Where you claim it | Schedule 1-A, Part III | Schedule 1-A, Part III |
Box 12 code TT reports your total qualified overtime compensation for 2026. It sits alongside the tips code (code TP), which is the parallel W-2 field for the separate tip deduction. Keep your final 2025 pay stubs; without a W-2 breakout, they are your evidence for the 2025 figure.
Qualified overtime is claimed in Part III of Schedule 1-A (Form 1040), Additional Deductions, the new schedule that also carries the tip deduction (Part II) and the car loan interest deduction (Part IV). Schedule 1-A is a different form from the older Schedule 1 (Additional Income and Adjustments to Income); do not confuse the two. The total from Schedule 1-A flows to Form 1040, line 13b.
Like the standard deduction, this deduction reduces your taxable income but not your AGI. That is a subtle but real limit: because your AGI does not fall, the deduction does not help you qualify for other AGI-based tax breaks. The steps are short:
If you run payroll for hourly staff, the compliance side lands on you starting with 2026 W-2s. You must track the FLSA premium portion of each employee's overtime separately from base wages and report the yearly total in Box 12, code TT. Payroll providers such as ADP, Paychex, and Gusto have added earnings codes to capture the qualifying premium; confirm yours is configured before year-end so the W-2 populates correctly.
Two points keep expectations straight. First, this is a worker benefit, not an employer one: your share of FICA on overtime does not change, and your payroll tax deposit schedule and Forms 941/940 are unaffected. Second, only the FLSA-required premium goes in code TT. Daily overtime, double-time, and other above-FLSA premiums you pay are wages, not qualified overtime, so keep them out of that box.
The overtime deduction and the "No Tax on Tips" deduction are separate benefits with separate caps that share Schedule 1-A. Overtime is capped at $12,500 (single) and covers the FLSA premium on hourly work; tips are capped at $25,000 (single) and cover qualified tip income in listed occupations. A worker can qualify for both, but the same dollar can never count twice. The occupation list, mechanics, and phase-outs for tips are in the No Tax on Tips guide. Overtime is one of four new OBBBA write-offs on Schedule 1-A, alongside the car loan interest deduction.
Figuring out the deductible premium means separating the FLSA "half" from your base wages and tracking it across a year of pay stubs. Jupid puts an AI accountant inside the messenger you already use: connect your bank account from WhatsApp or iMessage, and your income and expenses are categorized automatically at 95.9% accuracy, so your wage and withholding picture stays current. Ask "how much overtime have I banked this year?" in chat and get a running figure, plus a plain-English read on what the deduction saves you at your bracket and what Social Security and Medicare still take. Try Jupid.
This guide is for general educational purposes and does not constitute tax, legal, or accounting advice. The overtime deduction rules come partly from proposed regulations and transition guidance that may change as the IRS finalizes them. For advice specific to your situation, consult a qualified tax professional.
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Fintech CEO with 10+ years building accounting and financial technology products. Previously co-founded and scaled an AI-powered accounting platform to $30M revenue and 100K+ business users, achieving 30,000 customers per accountant through automation — recognized by CNBC as a top fintech company. Holds a Master's in Management Information Systems. At Jupid, he leads the development of AI-native bookkeeping, tax, and compliance tools designed for freelancers and small business owners.
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