What the deduction actually is
“No tax on overtime” is an easy headline and a misleading one. The federal rule is a deduction for qualified overtime compensation, and it covers only part of what you are paid for overtime.
The deduction is available for tax years 2025 through 2028. It lowers your taxable income; it does not remove overtime pay from your wages and it does not remove payroll taxes. The IRS says overtime pay generally remains subject to Social Security and Medicare tax. You can claim the deduction whether you take the standard deduction or itemize, you need a valid Social Security number, and married taxpayers must file jointly to claim it.
Why only the “half” counts
The most important detail is the part that qualifies. Federal law (the Fair Labor Standards Act, section 7) requires covered employees to be paid at least one and one-half times their regular rate for hours over 40 in a workweek. The deduction counts only the extra half, the premium above your regular rate, on hours the FLSA requires to be paid as overtime. The first “one” in “one and a half” is ordinary pay for hours worked and is not qualified overtime.
That gives a handy rule of thumb when you only know total overtime pay at time and a half: divide it by three. The IRS’s own example takes $15,000 of overtime pay at time and a half and arrives at $5,000 of qualified overtime.
Pay above time and a half does not add to the deduction. The IRS example for double time starts with $20,000 of total overtime pay, finds that the regular wages for those hours were $10,000, and still allows only the half-time premium of $5,000.
What does not qualify
According to the IRS instructions, these do not count as qualified overtime:
- pay above time and a half that comes from a collective bargaining agreement or state law,
- extra pay for weekends or holidays, unless the hours are also over 40 in the workweek,
- overtime paid only under state law to someone the FLSA does not cover, and
- tips, which have their own separate deduction.
Compensatory time is treated the same way as cash overtime. In the IRS example, $4,500 of such pay produces $1,500 of qualified overtime.
The limits
| Limit | Single, head of household, qualifying surviving spouse | Married filing jointly |
|---|---|---|
| Maximum deduction | $12,500 | $25,000 (shared by both spouses) |
| Phase-out starts when modified AGI exceeds | $150,000 | $300,000 |
| Reduction | $100 for each full $1,000 over the threshold | $100 for each full $1,000 over the threshold |
How the phase-out is calculated on Schedule 1-A
The reduction is computed in Part III of Schedule 1-A (Form 1040). Using the 2025 form’s lines:
- Line 15: the smaller of your qualified overtime (line 14c) or the maximum ($12,500 or $25,000).
- Line 16: your modified AGI, taken from line 3.
- Line 17: the threshold ($150,000 or $300,000).
- Line 18: line 16 minus line 17. If this is zero or less, your deduction equals line 15.
- Line 19: line 18 divided by $1,000, rounded down to a whole number.
- Line 20: line 19 multiplied by $100.
- Line 21: line 15 minus line 20, never below zero. This is your deduction.
For example, a single filer with $12,500 of qualified overtime and modified AGI of $160,500 has a line 18 of $10,500, a line 19 of 10, a line 20 of $1,000 and a deduction of $11,500. At $275,000 of modified AGI the reduction reaches $12,500 and the deduction is $0.
A full worked example
Sam earns $22.00 an hour and works six hours over 40 every week for 52 weeks. Overtime pay is 6 × $33.00 = $198 a week, or $10,296 a year. Qualified overtime is 6 × $11.00 × 52 = $3,432. With modified AGI of $80,000 there is no phase-out, so the deduction is $3,432. At an assumed 22% marginal rate that lowers federal income tax by about $755. It does not change Social Security or Medicare tax, and the exact effect depends on the rest of Sam’s return.
Overtime calculatorEnter your own rate, hours and income to see every line of the worksheet.Reporting and withholding
For 2025, employers are not required to report qualified overtime separately. Beginning in 2026 they report it in box 12 of Form W-2 with code TT. According to IRS guidance, an employer does not reduce income-tax withholding for the deduction unless the employee files a new Form W-4, so the benefit may show up when you file your return. The 2026 Schedule 1-A is still a draft marked “do not file”, so check the final form when it appears.
What the calculator does and does not do
The overtime calculator separates the qualified half-time premium from the rest of your overtime pay, applies the cap and the phase-out line by line, and shows your weekly, bi-weekly and annual gross. It does not model state overtime rules, fluctuating workweeks, tipped employees or your full tax return, and it is an estimate rather than tax advice. If you are converting shift times into hours first, the military time converter can calculate shift length across midnight.
Common questions
Is overtime pay now tax-free?
How do I know how much of my overtime qualifies?
Can married couples both claim it?
Do I need to itemize?
Sources
Reviewed on 18 Oct 2026 against the published sources below. Laws and prices change, so check the current position before you rely on a figure.
- IRS: No tax on overtime questions and answers (fact sheets FS-2026-01 and FS-2026-13, updated 6 August 2026)
- IRS: Schedule 1-A (Form 1040) for 2025, Part III, and the 2025 Form 1040 instructions; 2026 draft Schedule 1-A
- U.S. Department of Labor: Fact Sheet #23, Overtime Pay Requirements of the FLSA
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This guide is general information, not legal, financial or religious advice. Figures are estimates worked out from the sources above and may differ from what applies to you. See the disclaimer. Found a mistake? Tell us.