Federal tax on overtime works the same as tax on regular wages, with one recent exception: for tax years 2025 through 2028, a new federal deduction lets many workers shelter up to $12,500 of their overtime premium pay ($25,000 on a joint return) from federal income tax. Social Security and Medicare taxes still apply to every overtime dollar, and income tax withholding on overtime checks often looks steeper than it really is. Here is how each piece works and who actually benefits.
Overtime Counts as Taxable Wages
The Internal Revenue Code treats compensation for services as gross income, and overtime pay falls squarely inside that definition.1Office of the Law Revision Counsel. 26 U.S. Code 61 – Gross Income Defined The IRS does not distinguish between your first 40 hours and your 41st. Every dollar counts toward your total gross income for the year.
The Fair Labor Standards Act requires employers to pay non-exempt workers at least one and a half times their regular rate for hours beyond 40 in a workweek.2U.S. Department of Labor. Overtime Pay That premium rate produces higher gross pay, which historically meant a higher tax bill in proportion. The 2025 deduction changes the math for many workers, but only for the premium portion.
The 2025–2028 Overtime Deduction
The One Big Beautiful Bill Act created a federal income tax deduction for what the IRS calls qualified overtime compensation. It covers only the premium half of overtime pay, not the whole overtime check.3Internal Revenue Service. Questions and Answers About the New Deduction for Qualified Overtime Compensation If your regular rate is $30 an hour and your overtime rate is $45, the $15 premium per overtime hour is the deductible piece.
The cap is $12,500 per return, or $25,000 for married couples filing jointly. The deduction phases out at higher incomes: once your modified adjusted gross income exceeds $150,000 ($300,000 joint), it shrinks by $100 for every $1,000 above the threshold.4Office of the Law Revision Counsel. 26 USC 225 – Qualified Overtime Compensation A single filer loses the deduction entirely at $275,000 of modified AGI; joint filers lose it at $550,000.
The deduction is temporary. It applies to tax years 2025 through 2028 and expires for any tax year beginning after December 31, 2028.4Office of the Law Revision Counsel. 26 USC 225 – Qualified Overtime Compensation
Who Qualifies
The overtime has to be required under the Fair Labor Standards Act. That means you need to be a non-exempt employee covered by the FLSA. Salaried workers above the FLSA salary threshold in executive, administrative, or professional roles are exempt from the overtime rules and do not generate qualified overtime compensation, even in weeks they work far more than 40 hours.3Internal Revenue Service. Questions and Answers About the New Deduction for Qualified Overtime Compensation The current federal salary threshold for that exemption is $684 per week, or $35,568 annually.5U.S. Department of Labor. Earnings Thresholds for the Executive, Administrative, and Professional Exemption
Overtime required only by state law or a union contract does not qualify on its own. It has to be covered by the federal FLSA. Most hourly workers who earn time-and-a-half after 40 hours in a week are FLSA-covered, so this distinction mainly matters for workers in narrow state-specific overtime categories that federal law does not mirror.
A few other rules apply:6Internal Revenue Service. One, Big, Beautiful Bill Act – Tax Deductions for Working Americans and Seniors
- You must include a valid Social Security number on your return.
- Married taxpayers must file jointly to claim the deduction. Married filing separately is not eligible.
- You can take the deduction whether you itemize or use the standard deduction.
How to Claim It on Your Return
The deduction is reported on the new Schedule 1-A (Form 1040). The form asks for qualified overtime compensation from your W-2 (box 1) or, if applicable, from a Form 1099.7Internal Revenue Service. 2025 Schedule 1-A (Form 1040) It then walks through the cap and the phase-out based on your modified adjusted gross income.
Employers are not required to break out qualified overtime compensation on your W-2, though some may report it in Box 14. If yours does not isolate the premium, the IRS allows you to calculate it using methods in the Schedule 1-A instructions and IRS Notice 2025-69.3Internal Revenue Service. Questions and Answers About the New Deduction for Qualified Overtime Compensation In practice, that means using your pay stubs to identify overtime hours and computing the premium portion yourself.
Payroll Taxes Still Apply
The deduction reduces your federal income tax. It does not touch payroll tax. Social Security and Medicare taxes come out of every overtime dollar regardless of whether the income tax deduction covers it.
Under the Federal Insurance Contributions Act, you pay 6.2 percent toward Social Security up to the annual wage base limit.8Office of the Law Revision Counsel. 26 USC 3101 – Rate of Tax For 2026 that limit is $184,500, and wages above it are not subject to the Social Security portion.9Social Security Administration. Contribution and Benefit Base Medicare adds 1.45 percent on all wages with no cap. Your employer matches both.
Higher earners owe an additional 0.9 percent Medicare surtax on wages above $200,000 ($250,000 for joint filers), and the employer does not match this piece.10Internal Revenue Service. Topic No. 560, Additional Medicare Tax Your employer begins withholding it automatically once your wages cross $200,000 in a calendar year, regardless of your filing status.
Why Overtime Withholding Looks So High
Employers generally treat overtime as supplemental wages, and IRS Publication 15 gives them two methods.11Internal Revenue Service. Publication 15 (2026), Employer’s Tax Guide
The flat-rate method withholds 22 percent from the overtime portion. It applies when the overtime is paid separately or specifically identified on the pay statement.
The aggregate method combines your overtime and regular pay for the pay period and runs the total through the standard tax tables based on your W-4. Because the payroll system sees a larger-than-normal check, it may calculate withholding as if you earn that inflated amount every pay period. Withholding on that check can end up noticeably higher.
Neither method changes your actual tax bill. Both are prepayments. If too much comes out during the year, you get the difference back at filing. If too little comes out, you owe. The new overtime deduction adds a wrinkle because most payroll systems do not adjust withholding for it, so you may want to update your W-4 or plan for a larger refund.
Overtime and Your Tax Bracket
The federal income tax uses seven marginal rates: 10, 12, 22, 24, 32, 35, and 37 percent. A common fear is that overtime will push you into a higher bracket and somehow cost more than it earns. That is not how marginal rates work. Only the dollars above the bracket threshold are taxed at the higher rate. Your base income stays taxed at the lower rates no matter how much overtime you add. If overtime moves $5,000 of your income from the 12 percent bracket into the 22 percent bracket, that $5,000 costs an extra $500 in tax, and you still take home $4,500 more than you would have without it.
For reference, a single filer in 2026 moves from the 12 percent bracket into the 22 percent bracket at $50,400 of taxable income; the joint threshold is $100,800.12Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026, Including Amendments From the One, Big, Beautiful Bill The standard deduction ($16,100 single, $32,200 joint) reduces the income that hits those brackets, and the overtime deduction, if you qualify, cuts it further.
Effect on Income-Based Tax Credits
Extra earnings from overtime can shrink credits tied to income. The Child Tax Credit begins phasing out once your income exceeds $200,000 ($400,000 joint).13Internal Revenue Service. Child Tax Credit If overtime pushes your adjusted gross income past those thresholds, the credit gets smaller or disappears. The Earned Income Tax Credit has lower income ceilings, and heavy overtime can phase you out of it as well.
The extra pay is still a net gain, but the effective tax cost on those overtime dollars may be higher than the rate table suggests once shrinking credits are counted. Running an estimate through the IRS withholding estimator partway through a high-overtime year can help you avoid a surprise at filing.