Overtime pay in construction is taxed as ordinary wages, but starting in tax year 2025 a new federal deduction lets eligible W-2 workers write off the premium portion of that pay, up to $12,500 on a single return or $25,000 on a joint return. Social Security and Medicare taxes still come out of every overtime dollar, and your paycheck withholding can look punishing during a heavy week even when your final tax bill is reasonable. The construction overtime tax picture has several moving parts, and understanding how they fit together is what keeps you from overpaying.
The New Overtime Deduction for 2025 Through 2028
The One, Big, Beautiful Bill Act created a deduction under 26 U.S.C. ยง 225 covering tax years 2025 through 2028. If your overtime is required under the Fair Labor Standards Act, you can deduct the premium portion from your taxable income.1Office of the Law Revision Counsel. 26 U.S. Code 225 – Qualified Overtime Compensation The premium is the extra above your regular rate. If you make $30 an hour and time-and-a-half pushes you to $45, only the $15 counts.
The cap is $12,500 per year, or $25,000 on a joint return.2Internal Revenue Service. One, Big, Beautiful Bill Act: Tax Deductions for Working Americans and Seniors It phases out at higher incomes. For single filers, the deduction shrinks by $100 for every $1,000 your modified adjusted gross income exceeds $150,000 and disappears at $275,000. For joint filers, phase-out begins at $300,000 and ends at $550,000.1Office of the Law Revision Counsel. 26 U.S. Code 225 – Qualified Overtime Compensation Most hourly construction workers land well below those thresholds.
A few conditions apply. You need a Social Security number on the return. If you are married, you have to file jointly to claim it. You can take the deduction whether you itemize or use the standard deduction. Your employer must report qualified overtime compensation on your W-2, so the figure will be broken out when you file.2Internal Revenue Service. One, Big, Beautiful Bill Act: Tax Deductions for Working Americans and Seniors
Who Does Not Qualify
The deduction only covers FLSA-required overtime. Salaried workers classified as exempt from FLSA overtime cannot claim it, even if their employer pays extra for long weeks. Independent contractors receiving 1099 income sit outside the FLSA framework and cannot claim it either. The overtime must be reported on a W-2 or similar payee statement.1Office of the Law Revision Counsel. 26 U.S. Code 225 – Qualified Overtime Compensation
What It Is Worth
Take a worker at $32 an hour who logs 400 overtime hours at time-and-a-half. The premium is $16 per hour, so $6,400 in deductible pay. At a 22 percent federal rate, that is roughly $1,408 back. A worker with 800 overtime hours at the same rate would generate $12,800 in premium, nearly hitting the cap, and save around $2,750.
Why Your Overtime Check Looks Overtaxed
When overtime lands on the same paycheck as your regular wages, your employer combines both and calculates withholding as if the total is a single payment for that pay period.3Internal Revenue Service. Publication 15 Employers Tax Guide Payroll software then annualizes that combined figure across every pay period in the year. Earn significantly more in one week, and the system treats that amount as your new baseline.
That projection is the sting. A framer who normally clears $1,400 a week but pulls $2,200 during a deadline push gets tax withheld as though $2,200 were the weekly norm. The software projects it across the full year, lands on an inflated annual figure, and withholds against that. The check feels crushed, but the math reconciles when you file, and the excess comes back as a refund.
The Flat 22 Percent Alternative
If your employer pays overtime separately from regular wages, it can withhold a flat 22 percent on the overtime portion instead of running the annualized calculation.4Internal Revenue Service. Publication 15 – Employers Tax Guide Larger construction firms sometimes use this method for bonuses and irregular overtime runs to keep the numbers predictable.
Withholding is only a prepayment mechanism. It does not change what you actually owe. Final liability depends on your total annual income, deductions, and credits, all sorted out when you file.
FICA Still Hits Every Overtime Dollar
The new deduction reduces federal income tax. It does nothing for FICA. Social Security and Medicare come out of every overtime dollar at the same rates as your base pay.5Internal Revenue Service. 2026 Publication 15-T The employee share is 6.2 percent Social Security and 1.45 percent Medicare, totaling 7.65 percent.6Office of the Law Revision Counsel. 26 U.S.C. 3101 – Rate of Tax Your employer matches both.
Social Security tax stops once your earnings reach the wage base limit, which is $184,500 for 2026.7Social Security Administration. Contribution and Benefit Base Workers who combine high hourly rates with heavy overtime sometimes cross that line in the fall, which makes late-season paychecks noticeably larger. Medicare has no cap and keeps coming out regardless.8Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates
The Extra 0.9 Percent for High Earners
An additional 0.9 percent Medicare tax kicks in once wages exceed $200,000 in a calendar year, or $250,000 on a joint return. Your employer must start withholding this surtax as soon as your year-to-date pay crosses $200,000, regardless of filing status, and continues through the rest of the year.9Internal Revenue Service. Topic No. 560, Additional Medicare Tax
This matters for experienced tradespeople and foremen with consistent overtime. A journeyman electrician at $55 an hour who logs 600 overtime hours can push past $200,000. No employer match applies to this extra 0.9 percent. If you file jointly and your household stays below $250,000, you may recover some of the surtax as a credit when you file, since employers are required to use the $200,000 threshold for withholding even though the joint threshold is higher.6Office of the Law Revision Counsel. 26 U.S.C. 3101 – Rate of Tax
Brackets: Only the Dollars in the Higher Bracket Get the Higher Rate
Federal income tax is progressive. Each chunk of income is taxed at its own rate. For a single filer in 2026, the first $12,400 of taxable income is taxed at 10 percent, income from $12,401 to $50,400 at 12 percent, and income from $50,401 to $105,700 at 22 percent.10Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 Overtime that pushes you into the next bracket does not retroactively raise the rate on earlier earnings. Only the dollars that actually land inside the higher bracket get the higher rate.
A worker who hears “I moved into the 22 percent bracket” sometimes assumes every dollar earned all year is now taxed at 22 percent. That is not how it works. If taxable income goes from $48,000 to $55,000 because of overtime, only the $4,600 above $50,400 gets taxed at 22 percent. The rest stays at 10 and 12 percent. You always take home more by working more hours.
The 2026 standard deduction is $16,100 for single filers and $32,200 for joint filers.10Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 That deduction, plus the new overtime deduction, reduces taxable income before the bracket math starts. A single worker with $70,000 in wages and $6,000 in qualified overtime premium subtracts $16,100 and $6,000 to reach $47,900 in taxable income, staying entirely in the 12 percent bracket.
Adjust Your W-4 So You Get the Deduction in Each Check
Construction workers with variable overtime are prime candidates for overwithholding. The annualized calculation treats your busiest week as if it were the year’s norm, and if that pace does not hold, you have lent the government money interest-free until filing.
The IRS now instructs employers to use an updated W-4 that accounts for the overtime deduction so eligible workers see the benefit each pay period.5Internal Revenue Service. 2026 Publication 15-T You can file a new W-4 with your employer any time. Step 4(b) lets you enter additional deductions beyond the standard deduction, which lowers withholding on each check.11Internal Revenue Service. Form W-4 (2026) If you expect to claim the full $12,500 overtime deduction, entering that amount in Step 4(b) is the mechanism.
The IRS Tax Withholding Estimator is the best way to land on the right number. You need a recent pay stub and an estimate of overtime hours for the rest of the year. The tool accounts for income fluctuations and produces a recommended adjustment.12Internal Revenue Service. Tax Withholding Estimator Running it mid-season, once your overtime trajectory is clearer, tends to produce the most accurate result.
State Taxes and Traveling Between Job Sites
Most states with an income tax start from federal adjusted gross income or federal taxable income, so overtime flows through as ordinary wages. State withholding methods vary. Some offer a flat rate on supplemental wages, typically in the 5 to 12 percent range; others use the combined method the way federal payroll does.
Construction workers who travel across state lines run into an extra wrinkle. If you live in one state and work in another, you may owe tax to both unless the two have a reciprocity agreement. Where no agreement exists, you generally get a credit on your home state return for taxes paid to the work state, which prevents double taxation. Some states impose a withholding obligation on nonresidents after a certain number of work days. City or local occupational taxes may apply at the job-site location.
Whether the new federal overtime deduction carries onto your state return depends on how your state conforms to federal law. States that adopt federal AGI automatically pick it up. States that decouple from certain federal provisions might not. Check with your state’s tax authority.
If You Are a 1099 Contractor
Not every construction worker is on a W-2. If you receive 1099 income, the picture shifts. You cannot claim the federal overtime deduction, because it applies only to overtime compensation required under the FLSA, and the FLSA does not mandate overtime for independent contractors.1Office of the Law Revision Counsel. 26 U.S. Code 225 – Qualified Overtime Compensation
You also pay the full 15.3 percent self-employment tax on your net earnings, covering both the employee and employer shares of Social Security and Medicare.13Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes) No employer splits the cost. That 15.3 percent sits on top of federal income tax and applies to every dollar of profit up to the $184,500 Social Security wage base.7Social Security Administration. Contribution and Benefit Base The 2.9 percent Medicare portion continues past that with no cap.
Because nothing is withheld from your pay, you handle quarterly estimated tax payments yourself. The 2026 deadlines are April 15, June 15, September 15, and January 15, 2027.14Internal Revenue Service. Estimated Tax Missing them triggers an underpayment penalty with interest, so putting money aside from each check for the tax bill is the standard practice.