“No tax on overtime” is a federal income tax deduction, not an exemption from tax on your overtime check. For tax years 2025 through 2028, workers can deduct the premium part of overtime the Fair Labor Standards Act requires (usually the “half” in time and a half) up to $12,500 a year, or $25,000 on a joint return. Social Security and Medicare still come out of every overtime dollar, and your paycheck withholding doesn’t change.
That gap between the slogan and the rule is where people get surprised. Below: what counts, what doesn’t, how the income phase-out works, and how to find your number on the new 2026 W-2.
What changed and for which tax years
The One Big Beautiful Bill Act, signed July 4, 2025, added section 225 to the tax code. It lets eligible taxpayers subtract “qualified overtime compensation” when figuring taxable income. You claim it on the new Schedule 1-A attached to Form 1040, and you get it whether you take the standard deduction or itemize.
The deduction covers four tax years: 2025, 2026, 2027 and 2028. Unless Congress extends it, overtime earned in 2029 gets no special treatment.
Only the premium part counts
This is the rule most people miss. Qualified overtime compensation is the amount paid above your regular rate for overtime the FLSA requires. It isn’t your whole overtime check.
Say you earn $24.00 an hour and worked 200 overtime hours in 2026. Your overtime rate was $36.00, so those hours paid $7,200. But $4,800 of that is straight time you’d have earned anyway. The premium, $12.00 an hour, is the qualified part: 200 × $12.00 = $2,400. That’s your deduction, not $7,200.
The quick way to get there from a total: if all your overtime was at exactly 1.5x, divide total overtime pay by 3. $7,200 ÷ 3 = $2,400.
Some overtime doesn’t qualify at all:
- Overtime paid only because of a state rule, like daily overtime after 8 hours, when you didn’t also pass 40 hours that week.
- Premiums above what the FLSA requires, such as the extra half in double time. Only the 0.5x the FLSA requires counts.
- Overtime paid under a union contract or company policy that the FLSA doesn’t require (holiday premiums, weekend premiums).
- Pay for exempt employees. If your job is exempt from FLSA overtime, any extra pay for long weeks isn’t “required” overtime.
Not sure whether you’re covered? The exempt vs non-exempt guide walks through the tests.
Income limits and the phase-out
The deduction shrinks once your modified adjusted gross income passes $150,000, or $300,000 on a joint return. For every $1,000 over the line, the deduction drops by $100.
Two examples for a single filer:
| MAGI | Qualified overtime | After $12,500 cap | Phase-out reduction | Deduction |
|---|---|---|---|---|
| $80,000 | $2,400 | $2,400 | $0 | $2,400 |
| $170,000 | $12,000 | $12,000 | $2,000 ($20,000 over × 10%) | $10,000 |
At the full $12,500, the deduction disappears at $275,000 of MAGI for a single filer and, at $25,000, at $550,000 for a joint return. Most hourly workers are nowhere near either number, so for them the cap and the phase-out never come into play.
Married couples have to file jointly to claim it, and you need a valid Social Security number. The $12,500 cap is per return, not per job, so two jobs with overtime still share one cap.
What it’s worth in real money
A deduction lowers taxable income, so the saving is the deduction times your top tax bracket. On the $2,400 example above, a worker in the 12% bracket saves about $288 in federal income tax. In the 22% bracket, about $528. That’s real, but it’s a fraction of what “no tax on overtime” sounds like.
State income tax is separate. Some states follow the federal deduction and some don’t, so check your state’s rules before counting on a state saving.
Where to find your number: W-2 box 12, code TT
For 2026 and later, employers report qualified overtime on Form W-2 in box 12 with code TT. The IRS instructions say only the FLSA-required premium goes there, which means the employer does the divide-by-three work for you. Your 2026 W-2 is due by February 1, 2027.
2025 was different. Employers weren’t required to report the amount separately, so many workers had to estimate it from pay stubs using the Schedule 1-A instructions. Some employers gave a figure in box 14 or a separate statement instead.
If code TT looks wrong, ask payroll before you file. A common error is putting total overtime pay in box 12 instead of the premium. That would overstate your deduction by about three times.
How to estimate it before your W-2 arrives
- Add up every overtime hour on your 2026 pay stubs.
- Multiply by half your regular hourly rate. If your rate changed during the year, do each period separately.
- If you had weeks with daily overtime but under 40 hours total (California, for example), leave those hours out.
- Apply the $12,500 cap and, if your income is high, the phase-out.
The overtime calculator splits a week’s pay into straight time and premium, which is exactly the number you need. If your regular rate includes a shift differential or bonus, the premium is based on that higher rate, so the time and a half guide is worth a look.
FAQ
Does no tax on overtime mean my overtime isn’t withheld? No. Payroll withholds income tax, Social Security and Medicare on overtime as usual. You get the benefit when you file your return.
Can 1099 contractors claim it? Only overtime required by the FLSA counts, and independent contractors aren’t covered by FLSA overtime. A worker misclassified as a contractor is a different question for a tax professional.
Do I need to itemize? No. You claim it on Schedule 1-A whether you itemize or not.
Is it permanent? No. Under current law it applies to tax years 2025 through 2028.
Before you file, find box 12 on your W-2, check that the code TT amount is roughly a third of your total overtime pay, and ask payroll about anything that’s far off.
This article is general information, not tax advice. For your own return, use the IRS Schedule 1-A instructions or a tax professional.
