No Tax on Overtime: What Counts and What You Actually Keep

Headlines called it "no tax on overtime", and that raised a lot of hopes. The reality is more modest and more interesting: for tax years 2025 through 2028, part of your overtime pay can be deducted from your taxable income. It does not make overtime tax-free, and it does not change what comes out of your paycheck by itself. This guide explains what counts, how much you can deduct and what you actually keep from an overtime hour.

The short answer

• It is a federal income tax deduction, claimed on your tax return.
• Only the premium half of time and a half that the law requires counts.
• The maximum is $12,500 ($25,000 if married filing jointly), reduced at higher incomes.
• Social Security and Medicare tax still apply to all of your overtime.
• It applies to tax years 2025 to 2028.

What counts as qualified overtime?

The Fair Labor Standards Act (FLSA) requires covered employees to be paid at least one and a half times their regular rate for hours over 40 in a workweek. Only the "half" in that "time and a half" is deductible. If your regular rate is $30 an hour, the overtime rate is $45. The $30 is normal pay for the hour, and the extra $15 is the premium that qualifies.

That has three consequences:

• Double time. If your employer pays 2 times your rate, the deductible part is still only the half premium that the FLSA requires, not the whole extra amount.
• Overtime the FLSA does not require. Some contracts, daily overtime rules and bonuses go beyond what federal law requires. The extra may not qualify, so read the IRS guidance for your case.
• Exempt employees. People who are exempt from FLSA overtime do not have FLSA-required overtime to deduct.

Our Overtime Calculator shows your regular rate and how much of your pay is the premium.

How much can you deduct?

Your deduction is the smaller of your qualified overtime premium and a maximum. The maximum is $12,500 for most filers and $25,000 for joint filers. It shrinks when your modified adjusted gross income (MAGI) is above $150,000, or $300,000 for joint filers: the maximum falls by $100 for each $1,000 over the threshold. That means a single filer with $200,000 of MAGI has a maximum of $7,500, and the deduction ends at $275,000 (single) or $550,000 (joint).

The phase-out reduces the maximum, not your overtime. If your premium is $3,000 and your reduced maximum is still above $3,000, you lose nothing.

What you actually keep: a worked example

Take a single worker with a $30 regular rate who works 4 hours of overtime a week for 50 weeks, which is 200 overtime hours, and has $50,000 of other income. We use the 2026 brackets.

• Overtime pay: 200 × $45 = $9,000.
• Qualified premium: 200 × $15 = $3,000, so the deduction is $3,000.
• Federal income tax on the overtime: $720 after the deduction, instead of $1,080 without it. The deduction saves $360.
• Social Security and Medicare (7.65%): $688.50.
• What you keep: $7,592, about $37.96 for each overtime hour, or 84% of the gross.

The deduction is real money, but notice that most of what you keep comes from the overtime pay itself. The tax saving here is a bonus on top, not the main event.

Take-home from 200 overtime hours at different pay levels

Single filer, 2026 brackets, time and a half, no state income tax, Social Security and Medicare included:

Regular rate	Other income	Overtime pay	Deduction	Tax saved	You keep	Per hour
$18	$30,000	$5,400	$1,800	$216	$4,555 (84%)	$22.77
$25	$50,000	$7,500	$2,500	$300	$6,326 (84%)	$31.63
$35	$80,000	$10,500	$3,500	$770	$8,157 (78%)	$40.78
$45	$150,000	$13,500	$4,500	$1,080	$10,307 (76%)	$51.54

Try your own numbers in the No Tax on Overtime Calculator, which also adds your state tax.

Why overtime paychecks look taxed more

Many people notice that a big overtime paycheck has a lot withheld and decide overtime is taxed at a higher rate. It is not. Your employer works out withholding as if each paycheck were repeated all year, so an unusually large paycheck is withheld at the rate of a higher annual income. Your actual tax is worked out on your return from your whole year's income. Extra withholding comes back as part of your refund. Overtime is taxed at your normal bracket rates, and only dollars that land in a higher bracket are taxed at that higher rate.

Who qualifies?

• You must receive overtime that the FLSA requires.
• You need a valid Social Security number for employment, and it must be on your return.
• Married taxpayers must file jointly to claim the deduction. Married filing separately cannot.
• You can take it whether you itemize or use the standard deduction.

How do you claim it?

You claim the deduction on Schedule 1-A, which you attach to your Form 1040. For 2025, employers are not required to report qualified overtime separately, so you may need to work out the amount from your pay records using the Schedule 1-A instructions. From 2026, employers are required to report it separately, which should make it easier. Tax software walks you through it. If you want part of the benefit during the year instead of at filing, you can adjust your withholding with a new Form W-4. Ask your employer or a tax professional how.

What about state taxes?

The federal deduction does not automatically change your state income tax. A few states have introduced their own overtime tax breaks, and many have not, so check your state tax agency. In the calculator, enter your state's rate to see the effect.

Mistakes to avoid

• Deducting all of your overtime pay. Only the premium half qualifies.
• Expecting a bigger paycheck. The benefit arrives at tax time unless you change your withholding.
• Forgetting the phase-out. Household income above the threshold reduces the maximum.
• Assuming payroll taxes disappear. Social Security and Medicare still apply.
• Treating a calculator as your tax return. Use it to plan, then check the IRS instructions or a tax professional.