The no tax on overtime deduction lets hourly workers subtract part of their overtime pay from federal taxable income. It doesn't make overtime tax-free: only the premium counts, and payroll taxes still apply.
When it starts
- It covers overtime paid in 2025, 2026, 2027 and 2028.
- You claim it on Schedule 1-A, starting with your 2025 return.
- From 2026, your W-2 shows the amount in Box 12, code TT.
How it works
- Only the extra half counts: overtime hours × 0.5 × your regular rate. Double-time hours count the same 0.5.
- Cap: $12,500 a year, or $25,000 on a joint return.
- Phase-out: $100 less for every full $1,000 of income over $150,000 ($300,000 joint).
- Standard deduction or itemizing: you get it either way.
Example: $25 an hour
| Step | Amount |
|---|---|
| Overtime pay (400 hours × $37.50) | $15,000 |
| Deductible part (400 hours × $12.50) | $5,000 |
| Taxable income, without → with | $50,900 → $45,900 |
| Federal tax saved (2026, single) | $650 |
| Overtime kept after federal tax, Social Security and Medicare | $12,653 |
Who qualifies
- Your employer must be legally required to pay you overtime under the Fair Labor Standards Act.
- Salaried exempt workers don't qualify.
- Married couples must file jointly.
- You need a Social Security number valid for work.
- Overtime owed only under state law or a union contract counts just as far as federal law requires.
What it doesn't cover
- Social Security (6.2%) and Medicare (1.45%) still come out of all overtime pay.
- Most states with an income tax still tax overtime.
- If the child tax credit already wipes out your tax, the deduction can save less, or nothing.
Get it in your paycheck
Add your expected deduction to Form W-4 Step 4(b), and less tax is withheld each payday instead of waiting for a refund.
Try it yourself