No tax on overtime is a deduction for the overtime premium, not a tax exemption for overtime pay.
No tax on overtime is a federal income tax deduction for tax years 2025 through 2028. FLSA overtime-eligible workers can deduct the required premium above their regular rate (the “half” in time-and-a-half), up to $12,500 per return or $25,000 joint, reduced above $150,000 or $300,000 of MAGI. Social Security, Medicare and many state taxes still apply.
Key Takeaways
- The deduction is capped at $12,500 per return ($25,000 joint) and shrinks by $100 for every $1,000 of modified AGI above $150,000 ($300,000 joint) (26 U.S.C. §225).
- Only overtime the Fair Labor Standards Act requires counts, and only the premium: one-half of the regular rate for hours over 40 in a workweek. Double time, daily overtime under state law and union-contract overtime add nothing extra (IRS FS-2026-13, Q16).
- Starting with tax year 2026, the deduction is limited to the amount the employer reports on Form W-2 box 12, code TT; a substitute Form 4852 does not qualify (IRS FS-2026-13, Q20 to Q23).
- Overtime is still subject to the 6.2% Social Security and 1.45% Medicare employee taxes on every dollar, including the deductible premium (IRS Topic 751).
- Married workers must file jointly, and the worker needs a Social Security number valid for employment (IRC §225(d) and (e)).
- The deduction is taken after adjusted gross income (Form 1040 line 13b), so it does not lower AGI-based tests such as Medicare IRMAA (IRS, Schedule 1-A).
No Tax on Overtime: The Four Numbers in the Statute
Sources: 26 U.S.C. §225, added by P.L. 119-21 §70202 (July 4, 2025); IRS FS-2026-13 (August 2026). Only the FLSA-required premium above the regular rate counts, and from 2026 it must appear on Form W-2 box 12, code TT.
When does no tax on overtime start, and when does it end?
No tax on overtime started with the 2025 tax year and ends after the 2028 tax year. The One Big Beautiful Bill Act (P.L. 119-21), signed July 4, 2025, added section 225 to the Internal Revenue Code for taxable years beginning after December 31, 2024, and section 225(g) bars the deduction for any year beginning after December 31, 2028 (26 U.S.C. §225).
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Overtime earned in 2025 was claimed on returns filed in 2026, using estimates under IRS Notice 2025-69 because employers were not yet required to report it separately. Overtime earned in 2026 is the first year reported on Form W-2 in box 12 with code TT, on W-2s furnished in early 2027. Withholding does not change automatically; reflecting the deduction in paychecks requires a new Form W-4.
The overtime deduction is one of several temporary OBBBA deductions summarized alongside the rate tables in the 2026 tax brackets guide.
How does the no tax on overtime deduction work?
The deduction subtracts qualified overtime compensation from taxable income on Schedule 1-A, without excluding it from wages. The IRS is explicit that the deduction “does not mean that overtime compensation is excluded or exempt from gross income,” and overtime remains wages for income tax withholding, Social Security and federal unemployment tax (IRS FS-2026-13, Q1).
Overtime pay lands in W-2 box 1 and in adjusted gross income like any other wage. Schedule 1-A Part III computes the allowable amount, applies the $12,500 or $25,000 cap and the MAGI reduction, and the result flows to Form 1040 line 13b together with the other new deductions (IRS, Schedule 1-A). The deduction is available whether the household itemizes or takes the 2026 standard deduction of $16,100 single or $32,200 joint (IRS 2026 inflation adjustments).
Because the deduction sits below AGI, its value equals the qualified amount times the worker’s marginal federal bracket. A 12% bracket worker gets about half the per-dollar benefit of a 24% bracket worker.
What counts as qualified overtime, and what does not?
Qualified overtime is only the FLSA-required premium above the regular rate, which for most workers is one-half of the regular rate times hours over 40 in a workweek. Section 225(c) defines it as overtime “required under section 7 of the Fair Labor Standards Act” that is “in excess of the regular rate” (26 U.S.C. §225(c); DOL Fact Sheet #23).
The IRS formula is: FLSA hours over 40 in the workweek, times one-half, times the FLSA regular rate (IRS FS-2026-13, Q12). Each workweek stands alone, so hours cannot be averaged across two weeks. The regular rate includes most remuneration, so it can exceed the base hourly wage.
| Type of overtime pay | Counts toward the deduction? | Primary source |
|---|---|---|
| Time-and-a-half for hours over 40 in a workweek (FLSA nonexempt employee) | Yes, the half portion only | IRC §225(c); FS-2026-13 Q12 |
| Double time for the same hours | Only the FLSA-required half; the extra half is not qualified | FS-2026-13 Q16 |
| Daily overtime under a state law, weekend or holiday premiums, union-contract overtime | Only to the extent the FLSA itself requires it | FS-2026-13 Q4 and Q16 |
| Overtime paid to an FLSA-exempt salaried employee | No | FS-2026-13 Q4 |
| Owner-employee with a bona fide 20% equity stake who manages the business | Generally no (treated as an exempt executive) | FS-2026-13 Q5 |
| State or local government compensatory time under 29 U.S.C. §207(o) | Yes, when the comp time is used and paid or cashed out, at one-third of the rate | FS-2026-13 Q18 |
| Federal employee covered by OPM FLSA rules | Yes if SF-50 block 35 shows “N” (nonexempt) | FS-2026-13 Q26 |
A useful shortcut follows from the math: when overtime is paid at exactly time-and-a-half, the qualified amount is one-third of the total overtime pay. Notice 2025-69 used that one-third method for 2025, and the IRS FAQs use the same division for public-sector comp time (IRS Notice 2025-69).
How much can you deduct with no tax on overtime?
The deduction is the smaller of qualified overtime or $12,500 ($25,000 joint), then reduced by $100 for each $1,000 of MAGI above $150,000 ($300,000 joint). MAGI here is adjusted gross income plus any foreign earned income or territory income excluded under sections 911, 931 or 933 (26 U.S.C. §225(b)(2)(B)).
The joint cap is $25,000 per return, not $12,500 per spouse; two overtime earners filing jointly share one $25,000 ceiling. The phase-out works like a 10% clawback: every additional $1,000 of income in the band removes $100 of deduction. A single filer’s full $12,500 deduction disappears at $275,000 of MAGI, and a joint filer’s full $25,000 deduction disappears at $550,000.
Employers report the total qualified overtime paid, not the deductible amount. In the IRS example, an employer that pays $30,000 of qualified overtime reports $30,000 in box 12 code TT even though the deduction is capped at $12,500 (IRS FS-2026-13, Q10).
Is overtime still taxed under the new law?
Yes. Overtime pay is still subject to payroll taxes in full, to federal income tax on everything except the deductible premium, and to state income tax unless a state chooses to follow the federal deduction. The table shows each layer.
| Tax on overtime pay | Effect of the overtime deduction | Notes |
|---|---|---|
| Federal income tax on the FLSA premium (the “half”) | Deductible, up to the cap and phase-out | Claimed on Schedule 1-A, Form 1040 line 13b |
| Federal income tax on the straight-time part of overtime hours | None; fully taxable | About two-thirds of time-and-a-half pay |
| Social Security tax, 6.2% employee share | None; owed on every overtime dollar | Up to the 2026 wage base of $184,500 |
| Medicare tax, 1.45% employee share | None | Plus 0.9% Additional Medicare Tax on wages over $200,000 |
| Federal income tax withholding | None unless the employee files a new Form W-4 | 2026 Form W-4 step 4(b) accounts for the deduction |
| State and local income tax | Depends on whether the state conforms | Check the state revenue department |
Payroll tax rates come from IRS Topic 751, and the FICA mechanics are explained in more depth in payroll taxes explained. On withholding, the IRS says an employer may not reduce withholding for the deduction unless the employee furnishes an updated Form W-4 (IRS FS-2026-13, Q8 and Q9); the paystub side of that is covered in what FIT tax means on a paycheck.
Worked example: one overtime earner in 2026
In this hypothetical, a single worker earning $40 an hour with 250 FLSA overtime hours in 2026 deducts $5,000, and roughly two-thirds of the overtime pay remains taxable. The figures use the 2026 brackets and standard deduction from the IRS 2026 inflation adjustments.
- Pay. Base pay of 2,080 hours at $40 is $83,200. Overtime of 250 hours at $60 is $15,000. Total wages are $98,200, with no pre-tax deductions in this illustration.
- Qualified overtime. 250 hours times one-half times $40 equals $5,000, which is also $15,000 divided by three. That $5,000 appears in W-2 box 12, code TT.
- Taxable income. $98,200 minus the $16,100 standard deduction is $82,100 before the overtime deduction, and $77,100 after it. MAGI of $98,200 is far below $150,000, so no phase-out applies.
- Federal income tax. At 2026 single rates, tax on $82,100 is $12,774 ($5,800 plus 22% over $50,400); on $77,100 it is $11,674. The deduction is worth $1,100, which is $5,000 times the 22% bracket.
- What is still taxed. Of the $15,000 of overtime pay, $10,000 remains subject to federal income tax, and all $15,000 carries $1,147.50 of employee Social Security and Medicare tax (7.65%).
In this example, the payroll tax on the overtime alone exceeds the income tax the deduction removes: “no tax” describes one slice of one tax.
How do you claim the overtime deduction for 2026?
For 2026 through 2028, the claim starts with the code TT amount on Form W-2 and is finished on Schedule 1-A. The IRS FAQs leave no room for paystub estimates after 2025: “employees may not consider any amount of qualified overtime compensation in excess of what is reported on Form(s) W-2, box 12, code TT” (IRS FS-2026-13, Q20).
- Confirm FLSA overtime eligibility. Federal employees can check SF-50 block 35, where “N” means nonexempt.
- When the 2026 W-2 arrives, compare box 12 code TT with year-end paystubs (total overtime pay divided by three is a rough check when overtime is paid at time-and-a-half).
- If code TT is missing or understated, request a Form W-2c from the employer. Form 4852 cannot be used for this deduction (FS-2026-13, Q22 and Q23).
- If code TT is overstated, deduct only the qualified overtime actually paid (FS-2026-13, Q21).
- Enter the full code TT amount in Schedule 1-A Part III; the form applies the cap and MAGI reduction and carries the result to Form 1040 line 13b.
- File jointly if married, with a Social Security number valid for employment for each spouse who received qualified overtime (FS-2026-13, Q24 and Q25).
How do 401(k) contributions and Roth conversions interact with the overtime deduction?
They interact through MAGI: anything that lowers AGI can preserve the deduction in the phase-out band, and anything that raises AGI, including a Roth conversion, can shrink it. The overtime deduction itself does not reduce AGI, so it never helps with other AGI-based thresholds.
| Household move | Effect on MAGI | Effect on the overtime deduction in the phase-out band |
|---|---|---|
| Pre-tax 401(k) or 403(b) deferral (2026 limit $24,500, plus catch-up at 50+) | Lowers it | Restores $100 of deduction per $1,000 deferred |
| Roth 401(k) deferral | No change | No change |
| HSA contribution ($4,400 self / $8,750 family for 2026) | Lowers it | Restores $100 per $1,000 |
| Roth conversion | Raises it by the converted amount | Removes $100 per $1,000 converted above the threshold |
| Taking the overtime deduction itself | No change (below-the-line) | Does not lower IRMAA, Roth IRA or Social Security taxation tests |
Pre-tax deferrals reduce box 1 wages, as explained in how a W-2 shows 401(k) contributions, which is why they also reduce MAGI. A Roth conversion works the other way, because a Roth conversion counts as ordinary income in AGI.
Hypothetical joint example. A married couple has $290,000 of AGI, and one spouse has $20,000 in box 12 code TT. With no conversion, MAGI is under $300,000 and the full $20,000 is deductible, leaving taxable income of $237,800 in the 24% bracket (24% runs from $211,400 to $403,550 for joint filers in 2026). If the couple converts $40,000 of a traditional IRA, MAGI becomes $330,000, the deduction falls by $3,000 to $17,000, and taxable income rises by $43,000, not $40,000. Every converted dollar inside the phase-out band is effectively taxed at 26.4% (24% times 1.1) rather than 24%.
That cost does not by itself make a conversion right or wrong. Workers who expect a lower-income year after overtime ends, such as early retirement or a reduced schedule, sometimes evaluate a Roth conversion in a low-income year instead. Because the deduction sits below AGI, it also does not lower the income Medicare uses for IRMAA surcharges. Workers 65 and older may be able to combine it with the separate $6,000 senior deduction, which has its own MAGI phase-out; the retiree-side changes are summarized in OBBBA retirement tax changes for 2026. A financial professional can model how the phase-outs, brackets and conversion amounts interact in a given year.
Frequently asked questions
Is overtime pay tax-free now?
No. Overtime pay is still wages subject to federal income tax withholding, Social Security tax and Medicare tax. Federal law created a deduction, not an exclusion: only the premium portion of FLSA-required overtime can be deducted, up to $12,500 per return ($25,000 joint), for tax years 2025 through 2028.
Does no tax on overtime apply to salaried employees?
Only if the employee is FLSA overtime-eligible (nonexempt). Salaried executive, administrative, professional, outside sales and certain computer employees who are exempt from FLSA overtime do not receive qualified overtime compensation, even if an employer or union contract pays them overtime.
Is double time covered by the overtime deduction?
Only the part the FLSA requires. If an employer pays double time, the deductible amount is still one-half of the regular rate for each FLSA overtime hour. In the IRS example, a $20 per hour worker with 10 overtime hours paid at double time has $100 of qualified overtime compensation.
Can married couples filing separately claim the overtime deduction?
No. Section 225(e) of the Internal Revenue Code allows the deduction for a married taxpayer only on a joint return. The worker must also include a Social Security number valid for employment, issued before the return due date including extensions.
Does the overtime deduction lower adjusted gross income?
No. The deduction is figured on Schedule 1-A and entered on Form 1040 line 13b, after adjusted gross income. It lowers taxable income but not AGI, so it does not reduce income measures built on AGI, such as Medicare IRMAA or Roth IRA contribution eligibility.
Do you have to itemize to claim no tax on overtime?
No. The IRS states the deduction is available whether a taxpayer itemizes or takes the standard deduction, which is $16,100 single or $32,200 married filing jointly for 2026.
What if my 2026 W-2 does not show box 12 code TT?
Ask the employer for a corrected Form W-2c. For tax years after 2025, the IRS says only qualified overtime reported in box 12 code TT can be deducted, and a substitute Form 4852 does not satisfy the statute. Paystub estimates were allowed only for 2025.
Methodology. Rules and figures come from the statute (26 U.S.C. §225, added by P.L. 119-21), IRS FS-2026-13 (August 2026), IRS Notice 2025-69, IRS Schedule 1-A guidance, IRS Topic 751, the IRS 2026 inflation adjustments and DOL Fact Sheet #23. Both worked examples are hypothetical and simplified (no state tax, credits or other deductions). Because this is a tax topic, payroll vendor marketing and anonymous forum anecdotes were excluded.
This article is for educational purposes only and is not individualized investment, tax, or legal advice. Consult a qualified professional about your specific situation.
