No Tax on Overtime: How the Deduction Is Calculated

Only the premium half of time-and-a-half is deductible: for most workers, the extra 0.5 times the regular rate for each hour over 40 in a workweek, capped at $12,500 a year ($25,000 on a joint return) under the law as it stands on October 28, 2026. A worker earning $28 an hour who logs 400 overtime hours is paid $16,800 for those hours, yet only $5,600 is qualified overtime compensation, and at the 22% bracket that deduction cuts federal income tax by $1,232.

The gap between "overtime pay" and "qualified overtime compensation" is the first thing an estimate has to get right. The deduction is created by section 225 of the Internal Revenue Code, added by Public Law 119-21 in July 2025, and it applies to tax years 2025 through 2028 only: the statute says no deduction is allowed for any taxable year beginning after December 31, 2028. It is claimed on Schedule 1-A, whether or not you itemize. It does not touch Social Security or Medicare tax, it does not change what your employer withholds unless you file a new W-4, and it shrinks once modified adjusted gross income passes $150,000 ($300,000 joint).

Which overtime dollars count: the half, not the time-and-a-half

The IRS fact sheet on the deduction (FS-2026-13, August 2026) gives the weekly formula employers are expected to use:

FLSA hours over 40 in the workweek × one-half × the employee's FLSA regular rate = qualified overtime compensation for that week

Three words in that formula decide the result.

"FLSA." The overtime must be required by section 7 of the Fair Labor Standards Act (29 U.S.C. 207). The statute defines qualified overtime compensation as overtime pay required under that section that is in excess of the regular rate. Overtime an employer pays because a state law, a union contract or its own policy says so does not count, except for the slice the FLSA would have required anyway. The next section of this page covers the cases where that distinction removes most or all of the deduction.

"Workweek." The FLSA counts hours in a fixed 168-hour week, seven consecutive 24-hour periods that can start on any day and hour the employer chooses. Generally, each week stands alone, with no averaging across weeks. Under the general 40-hour rule, a 50-hour week followed by a 30-hour week is 10 overtime hours, not zero, and a 12-hour shift inside a 38-hour week is no FLSA overtime at all.

"Regular rate." This is the input that is easiest to get wrong, because it is not necessarily your base hourly wage. Under 29 U.S.C. 207(e) the regular rate includes "all remuneration for employment," divided by the hours actually worked that week. The Department of Labor's regulation at 29 CFR 778.207(b) names night-shift differentials as something that must be included, and IRS Notice 2025-69 mentions a nondiscretionary bonus as an example of pay that raises the regular rate above the base wage. Section 207(e) also lists what stays out, including gifts, pay for periods with no work because of vacation, holiday or illness, and bonuses whose payment and amount are left to the employer's sole discretion.

Here is what that does to the deductible amount. Take a warehouse worker with a $22.00 base rate who works 46 hours in a week, 20 of them on nights with a $2.00 differential, and who earns a $50 weekly production bonus that the employer pays whenever a target is met.

The difference is $5.87 a week. Over 48 such weeks it is $3,449.74 against $3,168.00, so a worker who estimates from the base wage understates the deduction by about $282. From 2026 the employer's payroll system does this math and reports the result, but anyone checking a W-2 or estimating ahead of time needs to know that shift premiums and earned bonuses push the half-time figure up.

Salaried employees who are not exempt from overtime follow the same logic. The Labor Department's overtime fact sheet works the case of a $405 weekly salary for 45 hours: the regular rate is $405 ÷ 45 = $9.00, and the five overtime hours earn an additional half of that, $22.50. That $22.50 is the qualified amount. The salary already paid straight time for every hour, so only the half-time top-up exists to deduct.

Three overtime earners, worked through a full year

The table runs the rule for three hourly workers who are paid 1.5 times their regular rate for FLSA overtime, are single, have no other income and take the 2026 standard deduction of $16,100. Each is paid for 2,080 base hours (40 hours × 52 weeks) and works overtime in 50 of those weeks. The regular rate equals the base wage in these examples, so there are no differentials or bonuses.

Three things come out of the table.

First, before the cap bites, the deduction is one third of total overtime pay at time-and-a-half, because the premium is 0.5 out of 1.5. A worker who reads "no tax on overtime" as "no tax on my overtime check" overestimates the deduction threefold.

Second, the saving is the deduction times the rate on the last dollars of taxable income, not the rate on the overtime. Worker A's taxable income stays inside the 12% bracket, so $2,700 saves exactly $324. Worker B sits in the 22% bracket before and after, so $5,600 saves $1,232.

Third, Worker C shows what happens at a bracket edge. Without the deduction, taxable income is $118,000, in the 24% bracket that starts above $105,700 for single filers in 2026. The $12,500 deduction brings it to $105,500. That takes $12,300 out of the 24% band and $200 out of the 22% band, so the saving is $2,952 + $44 = $2,996 rather than a flat 24% of $12,500, which would be $3,000. Near a boundary, multiply each slice by its own rate. Worker C also loses $1,000 of premium to the cap. At $45 an hour each overtime hour carries $22.50 of premium, so the $12,500 cap is reached after about 556 hours, and every overtime hour past that point is taxed in full.

Pay that looks like overtime but does not qualify

The IRS fact sheet is blunt: overtime compensation not required by the FLSA is not eligible, and an employee who is not eligible for FLSA overtime gets no qualified overtime compensation "regardless of other laws or circumstances (such as a collective bargaining agreement)". In practice that removes money in five common situations.

Double time and other rates above 1.5. If the employer pays more than the FLSA minimum, only the minimum premium counts. The IRS works the case of a worker at $20 an hour who works 50 hours and is paid double time for the 10 overtime hours. The employer pays $400 for those hours: $200 of straight time and $200 of premium. The FLSA required only $300, so the qualified amount is $100, the half of time-and-a-half, not the $200 premium the worker actually received.

State daily overtime. California requires time-and-a-half for hours past eight in a workday (up to 12) and double time after 12, according to the state Labor Commissioner's overtime page. The FLSA's general rule in section 7(a) counts only hours over 40 in the workweek; the daily thresholds it does contain are special cases, such as the 8-and-80 option for hospitals and residential care in section 7(j). Picture a California retail stock clerk on four 10-hour shifts with no alternative workweek schedule in place: 40 hours in the week, eight hours of state daily overtime, zero hours of FLSA overtime. That week contributes nothing to the deduction even though the pay stub shows eight overtime hours. The same clerk working five 10-hour shifts has 10 FLSA overtime hours (50 minus 40), and only the half-time premium on those 10 hours qualifies, whatever the stub calls the rest. The IRS lists hours past eight in a day, hours past 35 in a week, and weekend or holiday premiums as examples of non-FLSA overtime that the employer has to sort out under the FLSA's own crediting rules.

Union and contract premiums. A collective bargaining agreement that pays time-and-a-half after 37.5 hours, or double time on Sundays, is generous, but only the FLSA-required piece of each week qualifies. For a worker whose agreement already exceeds the FLSA, the deductible amount can be well below the overtime shown on the stub.

Exempt employees. Salaried executive, administrative and professional employees who meet the FLSA tests (including teachers and academic administrators in elementary and secondary schools), outside salespeople, certain computer professionals, certain commissioned retail employees, and a list of transport, seasonal amusement and agricultural workers are outside the FLSA's overtime requirement. If such an employer pays them overtime anyway, it is not qualified. The fact sheet adds that an employee who owns a bona fide 20% equity stake in the business and is actively engaged in managing it is treated as an exempt executive, so owner-employees generally get nothing.

Independent contractors. A 1099 contractor is not an FLSA employee and is not paid FLSA overtime. The fact sheet says the only time qualified overtime appears on a Form 1099-NEC or 1099-MISC is the rare worker who is an employee under the FLSA but treated as a contractor for tax purposes. Contractors setting aside tax for quarterly payments can use the 1099 tax set-aside table, which this deduction does not change.

Some employees have overtime set by a provision of section 7 other than the general 40-hour rule and still qualify. The fact sheet names employees of hospitals and certain residential care facilities, public-sector fire protection and law enforcement employees, and state or local government employees who receive compensatory time off. For them, the qualified amount is the overtime premium actually paid under the provision that applies, not a recalculation under the 40-hour rule. For comp time, the fact sheet says the overtime is "paid" for the deduction only when the time off is used and paid, or cashed out at separation, and the qualified share is the hours times the applicable rate divided by three. Federal employees covered by OPM rules check block 35 of their SF-50: "N" means overtime-eligible, "E" means not.

The cap and the income phase-out, line by line

Part III of Schedule 1-A turns the qualified amount into the deduction. The 2025 form and the IRS's early release draft of the 2026 form (marked "DRAFT -- DO NOT FILE" and still a draft as of October 28, 2026) run the same steps under different line numbers. The 2026 draft lists qualified overtime employer by employer, with the amount from box 12, code TT of each Form W-2.

Two details on that form are easy to miss.

The reduction is taken from the capped amount, not from $12,500. Someone with $5,600 of qualified overtime loses $100 for every full $1,000 over the threshold from their own $5,600. At a modified AGI of $206,000 it is gone: $206,000 minus $150,000 is $56,000, line 19 is 56, line 20 is $5,600. A single filer with the full $12,500 still keeps $6,900 at that income and loses the last of it at $275,000. The smaller your overtime, the lower the income at which the deduction disappears.

Partial thousands do not count. Line 19 of the 2025 form (line 25 of the 2026 draft) rounds down, so modified AGI of $150,999 produces no reduction at all, while $151,000 removes $100. The statute describes the same rate, $100 for each $1,000 by which modified AGI exceeds the threshold, which works out to 10 cents per dollar of income over the line, applied in $100 steps.

Modified AGI here is the adjusted gross income on Form 1040 line 11b, plus the excluded amounts the form lists: income from Puerto Rico, Form 2555 lines 45 and 50, and Form 4563 line 15. The statute describes the same thing as AGI increased by income excluded under sections 911, 931 and 933. Because the overtime deduction is taken after AGI, it does not lower the income used to test itself. A worker cannot use the deduction to pull their own MAGI back under $150,000.

A joint example ties it together. A married couple both work FLSA overtime, with $11,000 and $7,000 of qualified overtime on their W-2s and modified AGI of $310,400. Line 14c is $18,000, under the $25,000 joint cap. Line 18 is $10,400, line 19 is 10, line 20 is $1,000, and the deduction is $17,000. At their 24% bracket that is worth $4,080. Had they filed separately, the deduction would be zero for both, because the statute allows it to a married person only on a joint return.

What the deduction is worth in tax dollars

For a household budget, the useful number is not the deduction but the tax it removes. Inside a single bracket, the saving is the deduction times that bracket rate.

The table stops at 24% on purpose. For a single filer in 2026 the 32% bracket begins at $201,775 of taxable income. Reaching it takes adjusted gross income of at least $217,875 ($201,775 plus the $16,100 standard deduction), which is 67 full thousands into the phase-out, so the deduction can be no more than $12,500 minus $6,700, or $5,800, for any single filer in the 32% bracket. The joint version of the same arithmetic caps a married couple in the 32% bracket at $11,500. Below 32%, the phase-out also decides how much is left. Take a single worker at $60 an hour with 500 overtime hours: wages are $124,800 plus $45,000 of overtime, $169,800 in all, and the premium is $15,000. The cap cuts it to $12,500, the phase-out removes $1,900 (19 full thousands over $150,000), and the $10,600 that remains saves $2,544 at 24%.

The deduction does not touch payroll taxes. The IRS fact sheet says the deduction does not change the treatment of overtime for income tax withholding, Social Security and federal unemployment tax, and IRS Topic 751 sets the Medicare rate at 1.45% for the employee, with no wage base limit for Medicare tax. At the employee rates of 6.2% and 1.45%, Worker A from the earlier table still pays $619.65 of Social Security and Medicare on $8,100 of overtime, nearly twice the $324 of income tax the deduction removes. The 6.2% part stops at the 2026 Social Security wage base of $184,500, and employers withhold the 0.9% Additional Medicare Tax on wages over $200,000 in a calendar year, per IRS Topic 751; the deduction changes neither.

State income tax is a separate question that this page does not answer for any particular state. Mechanically, a state that starts its own return from federal adjusted gross income will not pick up the deduction on its own, because Schedule 1-A sits below AGI on the federal return. Whether a state adopts, rejects or copies the deduction depends on that state's legislation, so the state revenue department's current guidance is the place to check.

The same placement below AGI means other federal figures keyed to AGI, such as the income tests for many credits, are measured before this deduction. The full bracket tables for each filing status, with worked returns at four incomes, are in the 2026 federal income tax brackets guide.

Reporting: box 12 code TT from 2026, and the 2025 workarounds

For 2026 through 2028, the W-2 decides. Employers must report qualified overtime compensation in box 12 of Form W-2 with code TT, starting with tax year 2026. The amount reported is the full qualified figure, even above the cap: the IRS example has an employer reporting $30,000 with code TT for a worker who can deduct at most $12,500. Schedule 1-A then applies the cap and the phase-out.

The fact sheet treats code TT as a hard gate in both directions:

• Understated or missing. If the employer reports too little, the employee has to obtain a corrected Form W-2c. If the employer is unwilling or unable to issue one, the employee may deduct only what box 12 shows, even if more was earned. In the IRS example, a worker paid $10,000 of qualified overtime whose W-2 shows $5,000 is limited to $5,000 without a W-2c.
• No substitute form. A Form 4852 (the substitute W-2) does not count, because it is not a statement furnished by the employer under section 6051(a)(19).
• Overstated. If box 12 shows more than was actually paid, the employee may use only the amount actually paid. A $10,000 entry against $5,000 of real qualified overtime supports a $5,000 deduction.

That makes January the month to check. A worker who tracked their overtime through the year can compare their own half-time figure with box 12 as soon as the W-2 arrives, while there is still time to ask payroll for a correction before filing.

For 2025, the pay stub was enough. Employers were not required to report the amount for 2025, so Notice 2025-69 let workers use reasonable methods from their own records. Applied to Worker A's $8,100 of time-and-a-half overtime:

The notice also lets a worker adjust the one-third or one-fourth shortcut upward when a nondiscretionary bonus raised the regular rate, which is the same effect worked in the night-shift example at the top of this page. Those 2025 methods do not carry forward: the August 2026 fact sheet says no relief is available for tax years after 2025.

Who cannot claim it at all

Beyond the FLSA and income limits, the statute and the IRS add three filing conditions.

1. A valid Social Security number. The return must include the worker's Social Security number, and the fact sheet defines a valid number as one that is valid for employment and issued by the Social Security Administration before the return's due date, including extensions. An individual taxpayer identification number (ITIN) is issued by the IRS, not the Social Security Administration, so it does not meet that definition. If both spouses earned qualified overtime, both numbers must be valid and on the return.
2. A joint return if married. Married filing separately removes the deduction entirely. For a couple with $18,000 of qualified overtime, filing separately would forfeit that whole deduction.
3. Income that is in US gross income. Residents of US territories who file Form 1040 or 1040-NR can claim it only for overtime included in US gross income; a resident whose overtime is entirely excluded cannot claim it.

Itemizing does not matter. The deduction is available with either the standard deduction or itemized deductions, and it stacks with the separate deduction for qualified tips, which has its own cap. The statute keeps the two apart: a qualified tip cannot also be counted as qualified overtime.

Estimating your own number before December

A reasonable estimate needs four inputs, and two of them take arithmetic that a calculator on this site can do.

1. Your FLSA overtime hours for the year. Count only hours past 40 in each workweek, not daily overtime or contract overtime. Scheduled overtime times the number of weeks is a fair start.
2. Your regular rate. If your pay includes shift differentials, earned bonuses or work at two different rates, the regular rate is a weighted average, not your base wage. The blended overtime rate calculator does that weighting for two pay rates, and the salary to hourly with overtime calculator converts a salaried schedule into an hourly picture.
3. The deduction. Hours × 0.5 × regular rate, capped at $12,500 or $25,000, then reduced by $100 for each full $1,000 of modified AGI over $150,000 or $300,000.
4. Your marginal bracket. Turn your expected pay into an annual figure with the salary calculator, find your bracket in the federal brackets guide, and split the deduction across two brackets if it straddles one.

The saving normally arrives as a refund, because payroll keeps withholding on overtime as usual. The fact sheet says an employer may not reduce withholding for the deduction on its own, but the 2026 Form W-4 has a line for it: an employee can enter the expected deduction in step 4(b), using the step 4(b) deductions worksheet or the IRS Tax Withholding Estimator. For Worker B, putting $5,600 in step 4(b) moves roughly the $1,232 saving into the year's paychecks instead of a refund. The risk runs the other way if overtime falls short: claim $5,600 and earn $2,000 of premium, and about $792 too little is withheld at 22%, which can become a balance due.

This page explains how the federal rule works with stated inputs and is not financial or tax advice; your own deduction depends on facts only payroll records show, such as how an employer credits state and contract premiums against the FLSA requirement. Canadian overtime rules differ by province and carry no such deduction; they are worked in the Canadian overtime pay guide, one of the topic groups on the hubs page. If overtime is a regular part of your year, put this year's actual hours into the blended overtime rate calculator with your real differentials: the regular rate is the input that a shift premium or an earned bonus changes, and in the warehouse example above it moved the deduction by $282 over 48 weeks.

Sources

• Internal Revenue Service, "What to know about the No Tax on Overtime deduction" (caps, phase-out thresholds, SSN and joint-filing rules; page updated September 10, 2026): https://www.irs.gov/newsroom/what-to-know-about-the-no-tax-on-overtime-deduction (checked October 28, 2026)
• Internal Revenue Service, FS-2026-13, "Updates to questions and answers about the new deduction for qualified overtime compensation" (August 2026; weekly formula, double-time example, exemptions, 20% owners, comp time, W-2 box 12 code TT, W-2c, Form 4852, withholding and Form W-4 step 4(b), territories): https://www.irs.gov/pub/taxpros/fs-2026-13.pdf (checked October 28, 2026)
• 26 U.S.C. 225, Qualified overtime compensation (definition, $12,500 and $25,000 limits, $100 per $1,000 reduction, SSN, joint return, termination after 2028), via Cornell Legal Information Institute: https://www.law.cornell.edu/uscode/text/26/225 (checked October 28, 2026)
• Internal Revenue Service, Notice 2025-69 (tax year 2025 methods: one-third, one-half and one-fourth fractions, bonus adjustment): https://www.irs.gov/pub/irs-drop/n-25-69.pdf (checked October 28, 2026)
• Internal Revenue Service, 2025 Schedule 1-A (Form 1040), Parts I and III (MAGI lines and the rounding-down step): https://www.irs.gov/pub/irs-pdf/f1040s1a.pdf (checked October 28, 2026)
• Internal Revenue Service, 2026 Schedule 1-A (Form 1040), early release draft marked "DRAFT -- DO NOT FILE", created June 16, 2026 (Part III lines 16 to 27): https://www.irs.gov/pub/irs-dft/f1040s1a--dft.pdf (checked October 28, 2026)
• Internal Revenue Service, IR-2025-103, 2026 inflation adjustments (brackets and $16,100 standard deduction): https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2026-including-amendments-from-the-one-big-beautiful-bill (checked October 28, 2026)
• Internal Revenue Service, Topic 751, Social Security and Medicare withholding rates ($184,500 wage base for 2026): https://www.irs.gov/taxtopics/tc751 (checked October 28, 2026)
• U.S. Department of Labor, Fact Sheet #23, Overtime Pay Requirements of the FLSA (revised October 2019; the $405 salaried example): https://www.dol.gov/agencies/whd/fact-sheets/23-flsa-overtime-pay (checked October 28, 2026)
• 29 U.S.C. 207, Maximum hours (section 207(a) 40-hour rule, 207(e) regular rate and its exclusions, 207(j) hospitals and residential care), via Cornell Legal Information Institute: https://www.law.cornell.edu/uscode/text/29/207 (checked October 28, 2026)
• 29 CFR 778.207, other types of contract premium pay (night-shift differentials in the regular rate), via Cornell Legal Information Institute: https://www.law.cornell.edu/cfr/text/29/778.207 (checked October 28, 2026)
• California Department of Industrial Relations, Labor Commissioner's Office, overtime FAQ (daily overtime after 8 and 12 hours): https://www.dir.ca.gov/dlse/faq_overtime.htm (checked October 28, 2026)
• Worked examples are hand calculations on those rules using the 2026 single-filer brackets; they are illustrations with stated inputs.