No Tax on Overtime: How Much Will It Actually Save You?

At $25 an hour, 200 hours of overtime in a year cuts your federal income tax by about $300 if your top bracket is 12%, or $550 if it’s 22%. Work 400 overtime hours and the saving is $600 or $1,100. That’s less than the name No Tax on Overtime suggests, because the deduction only covers the extra half in time and a half (the $12.50 on top of the $25), and Social Security and Medicare tax still come out of every overtime dollar.

The deduction came in with the One Big Beautiful Bill Act, Public Law 119-21, which the IRS now files under the name Working Families Tax Cuts. It applies to tax years 2025 through 2028. The rules below come from IRS fact sheet FS-2026-13, issued in August 2026.

How does no tax on overtime work?

The law calls it a deduction for qualified overtime compensation, and the definition is tighter than most headlines made it sound. The IRS’s updated questions and answers on qualified overtime compensation describe it as overtime pay required by section 7 of the Fair Labor Standards Act that is in excess of your regular rate. The FLSA requires at least one and a half times the regular rate for hours past 40 in a workweek. Only the half is deductible. The base pay for those hours is taxed like any other wage.

The IRS gives employers a three-part formula: FLSA hours over 40 in the workweek, times one half, times your FLSA regular rate. Each workweek is figured on its own, so a 50-hour week followed by a 30-hour week still has 10 overtime hours in it, even though the two weeks average out to 40.

The deduction is capped at $12,500 per return, or $25,000 on a joint return, and it shrinks once modified adjusted gross income passes $150,000 ($300,000 joint). You need a Social Security number valid for employment, issued before your return’s due date. If you’re married you have to file jointly, and if both spouses earned overtime, both need valid numbers on the return. You can take it with the standard deduction or while itemizing.

The IRS’s No Tax on Overtime overview and the FAQ both stress that this is a deduction, not an exclusion. Your overtime still shows up in box 1 of your W-2, federal income tax is still withheld from it, and it still counts toward Social Security and Medicare wages.

How much tax will I save on overtime?

The two hourly workers in this example are made up, and they share these facts:

• Regular rate of $25 an hour, with no bonuses or shift differentials that would raise the FLSA regular rate.
• All overtime is FLSA overtime, meaning hours past 40 in a workweek, paid at time and a half.
• Single filers with modified adjusted gross income well under $150,000.
• The employer reports the premium correctly on the W-2.

Time and a half on $25 is $37.50. Split that hour apart: $25 is ordinary pay and $12.50 is the premium. The first worker logs 200 overtime hours, about four a week. That’s $7,500 of overtime pay, but only 200 times $12.50, or $2,500, is deductible. In the 12% bracket that’s $300 off the federal bill. In the 22% bracket it’s $550.

The second worker doubles it to 400 hours, roughly eight a week. That’s $15,000 of overtime pay, $5,000 deductible, and a saving of $600 at 12% or $1,100 at 22%. At $25 an hour you’d need 1,000 overtime hours, close to 20 a week, before the $12,500 cap starts to matter.

Payroll tax is another story. The employee share of Social Security and Medicare (7.65%) on the premium alone was $191.25 for the first worker and $382.50 for the second. The deduction doesn’t reduce those. And the bracket figures are the simple version: if a $5,000 deduction pulls part of your income from the 22% bracket down into 12%, your real saving lands somewhere in between.

Double time, daily overtime and salaried workers

Plenty of overtime pay never touches this deduction. The FAQ walks through a worker earning $20 an hour who works 50 hours in a week and gets double time for the extra 10. The employer pays $400 for those hours. The FLSA only required $300, of which $100 is the half-time premium, so $100 is all that qualifies. The extra $100 of double-time pay is taxed normally.

The same logic shuts out overtime that comes from somewhere other than federal law. The IRS names premiums for hours beyond 8 in a workday, hours beyond 35 in a week, and weekend or holiday work as examples of pay that may go past what the FLSA requires. If your state has a daily overtime rule, or your union contract pays overtime the FLSA doesn’t, your employer has to separate the FLSA-required piece, and only that piece counts.

Exempt employees get nothing. If you fall under an FLSA overtime exemption, the IRS says you don’t receive qualified overtime compensation regardless of any other law or a collective bargaining agreement that pays you overtime anyway. Its list of common exemptions starts with executive, administrative and professional employees, teachers included, and runs through outside sales, certain computer jobs, taxi drivers and some motor carrier and farm work. Owning 20% or more of the business while helping run it also makes you exempt.

The phase-out above $150,000

Lines 15 through 21 of Schedule 1-A (Form 1040) spell out the reduction. Start with the smaller of your qualified overtime or the cap. Subtract $150,000 ($300,000 joint) from your modified adjusted gross income, divide the excess by $1,000, round down to a whole number, and multiply by $100. Whatever that comes to is taken off the deduction.

A single filer with a $5,000 premium and MAGI of $165,000 loses 15 times $100, or $1,500, and deducts $3,500. At $200,000 the reduction reaches $5,000 and the deduction is gone. Someone claiming the full $12,500 hits zero at $275,000, and a couple claiming $25,000 hits zero at $550,000.

W-2 box 12, code TT

For 2025, employers weren’t required to break the premium out, so the IRS let workers piece it together. Its guidance for individuals who received tips or overtime during tax year 2025 (Notice 2025-69) says that if a pay stub or payroll statement shows total overtime paid at time and a half, you can divide that figure by 3 to get the premium. Paid at double time, you divide by 4. If the statement already shows the premium, you use that number.

That relief ended with 2025. Starting with tax year 2026, employers must report qualified overtime in box 12 of Form W-2 with code TT, and you can only deduct what’s on a properly furnished W-2. If the box 12 number is missing or too low, you need a corrected Form W-2c from your employer. A substitute W-2 on Form 4852 won’t do it, so an employer that refuses to correct the form leaves you stuck with the lower figure. That’s the trap buried in question 22 of the FAQ.

Your paycheck won’t change on its own, either. Employers keep withholding on overtime unless you hand in a new Form W-4; the 2026 version has room for the expected deduction in step 4(b).

Where it goes on your tax return

The deduction is claimed in Part III of Schedule 1-A, which you attach to Form 1040, 1040-SR or 1040-NR. You enter the full qualified overtime amount, the schedule applies the cap and the phase-out, and the final figure flows to line 13b of Form 1040. That line sits below adjusted gross income, so the deduction lowers taxable income without lowering AGI. Part II of the same schedule handles the separate deduction for qualified tips, which has its own occupation list and a $25,000 cap.

Your state return is a separate question. Each state decides whether to follow this federal deduction, so check with your state revenue department.

Steps to take before you file

1. Confirm you’re FLSA nonexempt. If you’re salaried and unsure, ask payroll which exemption they apply to you.
2. Pull your year-to-date overtime from your last pay stub and divide it by 3 (by 4 if it’s all double time) to estimate the premium before tax season.
3. When your 2026 W-2 arrives, find box 12, code TT, and compare it with your estimate. If it’s missing or short, ask for a Form W-2c before you file.
4. If you’d rather see the saving in your paychecks now, file a new 2026 Form W-4 using step 4(b).
5. Attach Schedule 1-A to your Form 1040. If you’re married, file jointly, or the deduction isn’t available.

Related reading

• Who Qualifies for No Tax on Tips, and How Much Is It Worth?
• Can You Contribute to a Roth IRA and a 401(k) in the Same Year?

The overtime deduction is written to expire after tax year 2028, and the IRS has already updated its overtime FAQ since the law passed. Before you claim it, check the current Schedule 1-A instructions on irs.gov, or have a tax preparer look over your W-2 and pay stubs.