Since 2025, hourly workers can deduct part of their overtime pay from federal taxable income. It is often called "no tax on overtime," but that name oversells it: only part of your overtime is deducted, there is a yearly cap, and Social Security and Medicare still come out of every dollar. This guide explains how the overtime tax deduction works in 2026, who qualifies, and how much it actually saves, with worked examples. If you would rather skip the math, our no tax on overtime calculator does it for you.
When does no tax on overtime start?
The deduction came from the One Big Beautiful Bill Act, signed on July 4, 2025. It covers overtime paid in the 2025, 2026, 2027, and 2028 tax years, and then ends unless Congress extends it. You claim it on Schedule 1-A when you file your return, starting with your 2025 return.
How does no tax on overtime work?
The deduction applies to qualified overtime compensation. That is only the premium part of your overtime pay, the extra "half" in time-and-a-half, and only overtime that the Fair Labor Standards Act (FLSA) requires your employer to pay.
Only the premium counts: overtime hours × 0.5 × your regular hourly rate. If you earn $25 an hour and get $37.50 for overtime, $12.50 of each overtime hour is deductible.
Double time counts the same: for double-time hours, the deductible part is still half your regular rate, not the full extra amount.
Yearly cap: up to $12,500, or $25,000 on a joint return.
Income phase-out: the cap drops by $100 for every full $1,000 of modified adjusted gross income (MAGI) over $150,000, or $300,000 if you file jointly.
Standard deduction or itemizing: you get it either way, on top of your other deductions.
Read the full no tax on overtime rules in our guide.
No tax on overtime examples for 2026
These examples assume 40 regular hours a week for the whole year, plus overtime in 50 of the 52 weeks, and the 2026 federal tax brackets.
$25 an hour, 8 overtime hours a week, single
That is 400 overtime hours at $37.50, or $15,000 of overtime pay, on top of $52,000 of regular wages. The deductible premium is 400 × $12.50 = $5,000, well under the $12,500 cap.
Taxable income: $50,900 without the deduction, $45,900 with it
Federal income tax: $5,910 without, $5,260 with
Tax saved: $650
The overtime is still taxed. After $930 of Social Security, $217.50 of Medicare, and $1,200 of federal income tax, this worker keeps $12,652.50 of the $15,000.
$35 an hour, 10 overtime hours a week, married filing jointly
500 overtime hours at $52.50 comes to $26,250 of overtime pay. The deductible premium is 500 × $17.50 = $8,750. Taxable income drops from $66,850 to $58,100 and federal income tax from $7,526 to $6,476, a $1,050 saving.
$60 an hour, 10 overtime hours a week, single
This is where the cap and the phase-out come in. The premium is 500 × $30 = $15,000, but the cap limits it to $12,500. Total pay is $169,800, which is $19,800 over the $150,000 threshold, so the cap is cut by 19 × $100 = $1,900. The final deduction is $10,600. At a 24% marginal rate, that saves $2,544 of federal income tax.
Plug in your own hourly rate, overtime hours, and filing status with the overtime deduction calculator.
Who qualifies for the overtime tax deduction?
You are non-exempt under the FLSA, so your employer is legally required to pay you overtime for hours over 40 in a workweek.
Salaried exempt employees, such as most managers and professionals, do not qualify, even if their employer pays them something extra for long hours.
If you are married, you must file jointly. Married filing separately gets no deduction.
You need a Social Security number valid for work.
Overtime paid only because of a state law or union contract, such as daily overtime after 8 hours in California, counts only as far as federal law would require it.
W-2 box 12 code TT
Starting with 2026 wages, employers report qualified overtime on your W-2 in box 12 with code TT. That is the number you use on Schedule 1-A. For 2025, many employers did not have a separate box yet, so workers could figure the premium from pay stubs or a separate statement from their employer.
If code TT on your W-2 looks wrong, compare it with your pay stubs. It should be close to your overtime hours times half your regular rate.
What no tax on overtime does not cover
Social Security and Medicare: the 6.2% and 1.45% payroll taxes still apply to all your overtime pay. See our guide to FICA, Social Security, and Medicare tax.
Most state income taxes: many states with an income tax still tax overtime in full.
The straight-time part: the regular rate you earn for each overtime hour is taxed as normal. Only the premium is deducted.
Credits that already wipe out your tax: if the child tax credit already brings your federal income tax to zero, the deduction can save less, or nothing.
How to get the savings in your paycheck
By default, you see the savings as a bigger refund when you file. To get them sooner, estimate your deduction for the year and enter it in Step 4(b) of Form W-4. Your employer will then withhold less federal tax from each paycheck. Learn more in what a W-4 is and how paycheck withholding works, and check your full take-home pay with our paycheck calculator.
No tax on overtime FAQ
Is overtime tax-free in 2026?
No. Only the premium part of your overtime, up to $12,500 ($25,000 joint), is deducted from federal taxable income. Payroll taxes and most state taxes still apply.
How much will no tax on overtime save me?
Your deductible premium times your marginal tax rate. For most hourly workers in the 12% or 22% bracket, that is a few hundred to a couple of thousand dollars a year.
Does no tax on overtime apply to salaried workers?
Only if they are non-exempt under the FLSA and paid overtime because the law requires it. Exempt salaried employees do not qualify.
Is there a no tax on overtime calculator for 2026?
Yes. Our free no tax on overtime calculator works from your hourly rate and overtime hours, or straight from W-2 box 12 code TT, and shows your deduction, your federal tax saving, and what you actually take home.
This article is for general information and is not tax, legal, or financial advice. Tax rules change, so confirm your situation with a tax professional.