No Tax on Overtime — the 2025–2028 Deduction, Explained
"No tax on overtime" sounds like your overtime check arrives untouched. The reality is narrower — but still real money for millions of hourly workers. Here's what the law actually says, with the numbers worked out.
What the law created
The One, Big, Beautiful Bill Act (signed July 4, 2025) created a new federal income tax deduction for "qualified overtime compensation," effective for tax years 2025 through 2028. Three words matter enormously:
Deduction, not exclusion. Your overtime pay still shows up as wages. It's still subject to income-tax withholding on every paycheck, and still subject to Social Security and Medicare. The tax break comes when you file: you deduct the qualifying amount from taxable income on Schedule 1-A. A deduction saves you (deduction × your marginal rate) — it is not a refund of everything withheld.
Premium, not the whole check. Only the extra half of time-and-a-half qualifies — the premium portion required by the Fair Labor Standards Act (FLSA). If you earn $25/hour and work 10 overtime hours, your overtime pay is $375, but the deductible premium is only $125 (10 × $12.50). Roughly one-third of the overtime check, not the whole thing.
FLSA-required only. Overtime your employer pays voluntarily, under a union contract above the FLSA minimum, under state law alone (like California's daily overtime rules), or paid to exempt employees generally does not qualify. Starting with tax year 2026, employers must report qualified overtime in W-2 Box 12 under Code TT — that number is your starting point.
The caps and the phaseout
| Single / Head of household | Married filing jointly | |
|---|---|---|
| Max deduction | $12,500/year | $25,000/year |
| Phaseout starts (MAGI) | $150,000 | $300,000 |
| Fully phased out (MAGI) | $275,000 | $550,000 |
Above the phaseout threshold, the cap shrinks by $100 for every $1,000 of MAGI over the line (with a floor rule — even $1 into a new $1,000 bracket costs the full $100). Married couples must file jointly to claim it; married filing separately is barred. You need a valid Social Security number. It works whether you take the standard deduction or itemize.
Worked example: what you actually save
Nurse, single filer, $28/hour regular rate, works 8 overtime hours every week, 52 weeks a year. 22% marginal bracket, MAGI well under $150,000:
| Step | Calculation | Result |
|---|---|---|
| Overtime hours/year | 8 × 52 | 416 hours |
| Deductible premium | 416 × ($28 × 0.5) = 416 × $14 | $5,824 |
| Under the cap? | $5,824 < $12,500 | Yes, fully deductible |
| Phaseout? | MAGI < $150,000 | No reduction |
| Tax saved | $5,824 × 22% | ≈ $1,281 |
$1,281 back — meaningful, but a far cry from "no tax on the whole overtime check." Note what didn't change: Social Security (6.2%) and Medicare (1.45%) still applied to every overtime dollar, and your employer withheld income tax on the overtime normally throughout the year. The $1,281 shows up as a smaller bill (or bigger refund) at filing.
Phaseout example: single filer, $165,000 MAGI. That's $15,000 over the threshold → cap drops by 15 × $100 = $1,500 → effective cap $11,000.
Five things that trip people up
- Your paychecks won't change. Withholding rules didn't change — only the deduction at filing did. Don't expect bigger deposits.
- State taxes mostly don't follow. Most states haven't conformed, so your state return likely taxes the overtime fully.
- 2025 was the messy year. There was no W-2 box for it; the IRS allowed pay-stub-based calculations (Notice 2025-69). From 2026, Box 12 Code TT is the number to use — check it against your final pay stub.
- Exempt employees generally don't qualify. If you're salaried exempt and your employer pays "overtime" voluntarily, it usually isn't FLSA-required premium.
- It sunsets after 2028. Unless Congress extends it, tax year 2028 is the last one.
Get your number
Estimate your overtime earnings with our Overtime Pay Calculator, take the premium portion (roughly a third of the total), and multiply by your marginal bracket — that's your real savings.
FAQ
Is overtime really tax-free now? No. It's a federal income-tax deduction on the premium portion only, capped, for 2025–2028. Withholding, FICA, and (usually) state tax still apply.
How much of my overtime check qualifies? Only the "half" — the 0.5× premium above your regular rate. On time-and-a-half, that's one-third of the overtime pay.
Do I need to itemize to claim it? No. It's an above-the-line deduction on Schedule 1-A — available with the standard deduction too.
I'm an independent contractor working extra hours. Do I qualify? Generally no. The deduction is for employees' FLSA-required overtime premium; genuine 1099 contractors aren't covered.
What if my W-2 Box 12 Code TT looks wrong? Compare it against your final pay stub's overtime premium total. If it's off, ask your employer for a corrected W-2 (W-2c) early — don't wait until April.
Data sources
- One, Big, Beautiful Bill Act (P.L. 119-21, signed July 4, 2025), §70202 (new IRC §225): deduction for qualified overtime compensation, tax years 2025–2028.
- IRS Fact Sheet FS-2026-13 (Aug 6, 2026): caps ($12,500 / $25,000), MAGI phaseout ($150k/$300k, −$100 per $1,000, gone at $275k/$550k), FLSA-only scope, Schedule 1-A, Box 12 Code TT from 2026.
- IRS Notice 2025-69: 2025 transition-year calculation methods.
Estimates only, not tax advice.