Yes, overtime is taxable. Every overtime dollar is wages, reported on your W-2, and subject to federal income tax, Social Security, and Medicare just like your regular pay. What changed for 2025 through 2028 is a new federal deduction that lets many hourly workers write off up to $12,500 of their overtime premium ($25,000 on a joint return) when they file. Payroll taxes and most state income taxes still apply to the full amount.1Office of the Law Revision Counsel. 26 USC 225 – Qualified Overtime Compensation
What Taxes Come Out of Overtime Pay
Overtime is ordinary income for federal tax purposes. At year end, your overtime earnings combine with your base pay to form your gross income, and every overtime dollar faces the same federal tax rates as your regular wages. There is no special lower rate for hours worked past 40.2Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
Every overtime paycheck also gets hit with the standard payroll taxes: 6.2% for Social Security and 1.45% for Medicare, withheld from your check with a matching amount paid by your employer. These are separate from income tax and are not touched by the new overtime deduction. Medicare has no earnings cap, so the 1.45% applies to everything you earn.3Social Security Administration. Contribution and Benefit Base
Most states with an income tax treat overtime the same as regular wages, and the federal overtime deduction does not automatically flow through to state returns. Each state decides on its own whether to conform, and most have not. If you live in a state without an income tax, that piece doesn’t apply to you. Some local jurisdictions also tax all earned compensation, including overtime.
The New Overtime Deduction for 2025 Through 2028
The One, Big, Beautiful Bill Act created a federal income tax deduction for overtime pay starting in tax year 2025 and running through 2028. It doesn’t make overtime tax-free at the paycheck level. Your employer keeps withholding federal income tax, Social Security, and Medicare every pay period. You claim the deduction when you file your annual return, and it reduces the income you owe federal tax on.4Internal Revenue Service. One, Big, Beautiful Bill Act – Tax Deductions for Working Americans and Seniors
It is an above-the-line deduction, so it reduces your adjusted gross income whether or not you itemize. You still get the standard deduction on top of it.
Only the Premium Portion Counts
The deduction covers just the extra pay you get for going over 40 hours, not the full overtime hourly rate. If you earn $30 an hour and get time-and-a-half, your overtime rate is $45. The deductible piece is the $15 “half,” not the whole $45.5Internal Revenue Service. Questions and Answers About the New Deduction for Qualified Overtime Compensation
Only overtime that your employer is required to pay under the Fair Labor Standards Act qualifies. Salaried workers classified as exempt from FLSA overtime rules are shut out, even if the employer voluntarily pays something it labels “overtime.” Independent contractors are also excluded.
Caps and Income Phaseout
The deduction maxes out at $12,500 a year for most filers and $25,000 on a joint return. It phases out at higher incomes. Once your modified adjusted gross income passes $150,000 (or $300,000 filing jointly), the deduction shrinks by $100 for every $1,000 of income above that threshold. It disappears entirely at $275,000 for single filers and $550,000 for joint filers.1Office of the Law Revision Counsel. 26 USC 225 – Qualified Overtime Compensation
Married taxpayers have to file jointly to claim it, and every person claiming the deduction needs a Social Security number valid for employment.5Internal Revenue Service. Questions and Answers About the New Deduction for Qualified Overtime Compensation
How to Claim It on Your Return
Starting with 2026 W-2 forms, employers will report your total qualified overtime premium in Box 12 using Code TT. That figure is your starting point for the deduction. For tax year 2025, the IRS is allowing transition relief because many employers won’t have the reporting in place yet, so workers can rely on pay stubs or other earnings records to calculate the deductible amount using a reasonable method.6Internal Revenue Service. 2026 General Instructions for Forms W-2 and W-3
The deduction expires after tax year 2028 unless Congress renews it.1Office of the Law Revision Counsel. 26 USC 225 – Qualified Overtime Compensation
Why Your Overtime Check Looks So Heavily Taxed
A paycheck from a heavy overtime week can look like the government took an outsized bite, even when your real annual tax rate hasn’t changed. The reason is how employers calculate withholding, not the tax itself.
Employers generally handle overtime withholding one of two ways. The first is a flat 22% withholding rate applied to supplemental wages such as overtime, bonuses, and commissions. The second adds the overtime to your regular pay for that period and withholds as if you earned that inflated amount every pay period all year. If you normally gross $2,000 per biweekly check and one check comes in at $3,200, the payroll system may withhold as though you make $83,200 annually instead of your actual pace.7Internal Revenue Service. Publication 15 (2026), (Circular E), Employers Tax Guide
Either method can over-withhold when overtime is sporadic. Your actual income determines your real tax bill when you file, and any excess comes back as a refund. It’s a timing issue, not an extra tax.
Does Overtime Push You Into a Higher Tax Bracket
The federal tax system is progressive: different slices of income are taxed at different rates. Heavy overtime can push part of your income into a higher bracket, but only the dollars above the bracket threshold are taxed at the higher rate. If your regular salary lands you at $48,000 in taxable income and overtime adds $8,000, only the portion that crosses the next threshold is taxed at the higher rate. The rest stays at the lower rate. Working more hours always leaves you with more take-home pay.8Internal Revenue Service. Federal Income Tax Rates and Brackets
The new deduction softens the bracket effect for eligible workers. If that $8,000 of overtime included $4,000 in deductible premium, your taxable income drops by $4,000 before the bracket math runs.
Overtime, Social Security, and Your 401(k)
Overtime counts toward your Social Security earnings record. The Social Security Administration calculates your retirement benefit using your 35 highest-earning years adjusted for wage growth, so years with significant overtime can raise your average and increase your monthly benefit, especially when they replace lower-earning years.9Social Security Administration. Social Security Benefit Amounts
For a 401(k) or similar employer plan, overtime generally counts as eligible compensation, so your contributions and any employer match can be calculated on your total pay including overtime. Specific plan rules vary. Check with your plan administrator if you want to confirm how your plan handles it.