Overtime pay can make a big difference for hourly workers in manufacturing, health care, public safety, construction, retail, and many other fields. Under the One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, eligible workers can now deduct part of their overtime pay from federal taxable income. The provision is widely called “no tax on overtime,” but the details matter: it covers only a specific portion of overtime pay, it has dollar limits and an income phase-out, and payroll taxes still apply. This guide explains how the no tax on overtime deduction works and how to claim it.
*This article is for general informational purposes and is not tax advice. Consult the IRS or a qualified tax professional for guidance on your situation.*
The key facts
- Deduction limit: up to $12,500 per year for single filers and up to $25,000 for married couples filing jointly.
- Years: tax years 2025 through 2028.
- What is deductible: only the premium portion of overtime required by the Fair Labor Standards Act (FLSA), not your entire overtime paycheck.
- Available to non-itemizers: you can claim it along with the standard deduction.
- Phase-out: begins at $150,000 of modified adjusted gross income (MAGI), or $300,000 for joint filers.
- Federal income tax only: Social Security, Medicare, and most state income taxes still apply.
What counts as qualified overtime compensation
This is the most misunderstood part of the law. The deduction covers qualified overtime compensation, defined as overtime pay required under section 7 of the FLSA that exceeds your regular rate of pay.
Under the FLSA, covered nonexempt employees must generally be paid at least one and one-half times their regular rate for hours worked over 40 in a workweek. The deductible portion is the extra “half,” the premium above your regular rate.
Example
Suppose you earn $24 per hour and work 10 overtime hours in a week at time-and-a-half, or $36 per hour:
| Item | Amount |
|---|---|
| Total overtime pay (10 hours × $36) | $360 |
| Regular-rate portion (10 hours × $24) | $240 |
| Premium portion (10 hours × $12) | $120 |
| Deductible as qualified overtime | $120 |
Only the $120 premium is deductible, not the full $360.
What does not count
- Overtime not required by the FLSA. If your employer pays overtime for working more than 8 hours in a day, under a union contract, or under state law beyond what federal law requires, those extra amounts generally do not qualify unless they are FLSA-required overtime.
- Double-time premiums beyond time-and-a-half, to the extent they exceed the FLSA requirement.
- Overtime for exempt employees. Salaried employees who are exempt from FLSA overtime rules, such as many managers and professionals, generally do not have qualified overtime compensation even if their employer voluntarily pays extra.
- Holiday or shift premiums not tied to FLSA overtime hours.
Because rules can be technical, especially for public employees, health care workers on special pay periods, and workers with multiple pay rates, review IRS guidance or ask your employer how your overtime is calculated.
Who qualifies
To claim the deduction, you generally must:
- Receive FLSA-required overtime as a nonexempt employee
- Have that overtime reported on Form W-2, Form 1099, or another statement as allowed by IRS rules
- Include a valid Social Security number on your return
- File jointly if married
The income phase-out
The maximum deduction is reduced by $100 for each $1,000 of MAGI above the threshold:
| Filing status | Phase-out starts |
|---|---|
| Single, head of household | $150,000 MAGI |
| Married filing jointly | $300,000 MAGI |
For example, a single filer with MAGI of $170,000 would have the $12,500 maximum reduced by $2,000, to $10,500. If their qualified overtime premium was $6,000, they could still deduct all $6,000.
What taxes still apply
The deduction reduces federal income tax only. Your overtime pay is still subject to:
- Social Security and Medicare taxes withheld from your paycheck
- State and local income taxes, depending on your state’s rules
- Federal income tax withholding during the year, since the deduction is claimed on your return. Your refund or balance due will reflect the deduction.
Because payroll taxes still apply, overtime continues to count toward your Social Security earnings record.
How to claim the deduction
Schedule 1-A
You claim the overtime deduction on Schedule 1-A of Form 1040, the same schedule used for the tips deduction, the car loan interest deduction, and the enhanced deduction for seniors. You will enter your qualified overtime compensation and calculate any phase-out.
Finding your qualified overtime amount
For tax year 2025, the IRS provided transition relief because employers were not required to separately report qualified overtime on Forms W-2. Workers could use reasonable methods to figure the premium portion, such as reviewing pay stubs that show overtime hours and rates, or using an employer-provided statement. For later years, employers are expected to report qualified overtime compensation separately on information returns. Check the current year’s IRS instructions and your W-2.
If your pay stub shows only total overtime paid at time-and-a-half, the premium portion is generally one-third of that total. For example, $3,000 of time-and-a-half overtime contains $1,000 of premium pay.
Keep records
- Save all pay stubs showing overtime hours and rates
- Note any overtime paid under state law or contract terms that may not be FLSA-required
- Keep any employer statements about qualified overtime
Example scenarios
A single warehouse worker
A worker earns $55,000 in regular wages plus $9,000 in time-and-a-half overtime. The premium portion is about $3,000, which the worker can deduct, assuming the overtime is FLSA-required and MAGI is below $150,000.
A married couple, both earning overtime
One spouse is a nurse with $6,000 of qualified premium pay and the other is an electrician with $4,500. Filing jointly with MAGI under $300,000, they can deduct $10,500, which is within the $25,000 joint limit.
A high-earning technician
A single technician has MAGI of $230,000. The excess over $150,000 is $80,000, which reduces the maximum deduction by $8,000, to $4,500. If qualified premium pay is $7,000, the deduction is limited to $4,500.
Planning considerations
- Adjust withholding if appropriate. If you regularly work overtime, the deduction may lead to a larger refund. You can update Form W-4 to reduce withholding, but be careful not to under-withhold. The IRS Tax Withholding Estimator can help.
- Ask your employer how overtime is classified. Knowing which pay is FLSA-required matters for the deduction.
- Combine with other deductions. If you also receive qualified tips, you may be able to claim both deductions, but the same income cannot be counted twice.
- Remember the end date. The deduction is scheduled to expire after 2028.
How the deduction affects AGI
The overtime deduction is subtracted after adjusted gross income (AGI) is calculated. That means it reduces taxable income but not AGI. Tax benefits that depend on AGI, such as some credits and phase-outs, are generally not affected by the deduction itself.
Frequently Asked Questions
Is all overtime pay tax-free now?
No. Only the FLSA-required premium portion of overtime, typically the “half” in time-and-a-half, is deductible, up to $12,500 ($25,000 joint), and it phases out at higher incomes. Payroll taxes still apply.
Do salaried workers qualify for the overtime deduction?
Exempt salaried employees who are not entitled to FLSA overtime generally do not qualify. Nonexempt salaried employees who receive FLSA-required overtime may qualify.
Does state-required daily overtime count?
Generally, only overtime required by the federal FLSA counts as qualified overtime. Overtime paid solely because of state law or a contract may not qualify.
Do I need to itemize to claim it?
No. It is claimed on Schedule 1-A and can be taken in addition to the standard deduction.
How long does the no tax on overtime deduction last?
Under current law, it applies to tax years 2025 through 2028.
This article is for general informational purposes only and is not legal, medical, tax, or financial advice. Rules vary by state and change over time; confirm details with the relevant agency or a licensed professional.
