Firefighters can now deduct part of their overtime pay from federal income tax. The One Big Beautiful Bill Act, signed on July 4, 2025, created an above-the-line deduction for qualified overtime compensation that runs from tax year 2025 through 2028.1Internal Revenue Service. Treasury, IRS Provide Guidance for Individuals Who Received Tips or Overtime During Tax Year 2025 The cap is $12,500 for a single filer and $25,000 for a couple filing jointly, and the benefit phases out at higher incomes.2Internal Revenue Service. What to Know About the No Tax on Overtime Deduction The “no tax on overtime” label oversells it. This is a deduction, not a full exclusion, and Social Security and Medicare taxes still come out of every overtime dollar.
Only the Premium Half Counts
The deduction does not cover your whole overtime paycheck. It covers the premium portion, meaning the amount above your regular hourly rate.3Internal Revenue Service. Questions and Answers About the New Deduction for Qualified Overtime Compensation If your regular rate is $30 an hour and you get time-and-a-half at $45, only the extra $15 per hour is qualified overtime compensation. The base $30 you would have earned anyway stays fully taxable.
The same limit applies if your department pays double time. Only the amount the FLSA requires counts, not any additional premium your contract adds on top. On a $30 base rate, double time pays $60 per hour, but only $15 of that qualifies, because the FLSA only requires time-and-a-half.3Internal Revenue Service. Questions and Answers About the New Deduction for Qualified Overtime Compensation
Does Firefighter Overtime Under a 207(k) Schedule Qualify?
Yes, in almost every case. The deduction only applies to overtime required by Section 7 of the Fair Labor Standards Act. Overtime paid solely because of a union contract or state law, with no FLSA obligation behind it, does not count.3Internal Revenue Service. Questions and Answers About the New Deduction for Qualified Overtime Compensation
Firefighters fall under a special FLSA rule that lets employers use work periods of 7 to 28 consecutive days instead of the standard workweek. Under a 28-day work period, overtime kicks in after 212 hours. Under a 14-day period, it starts after 106 hours.4U.S. Department of Labor. Fact Sheet 8 – Law Enforcement and Fire Protection Employees Under the Fair Labor Standards Act That overtime is still FLSA-required, so it qualifies for the deduction. The threshold is simply higher than 40 hours.
One narrow group is left out. Firefighters at a public agency with fewer than five fire protection employees are exempt from the FLSA’s overtime rules entirely.4U.S. Department of Labor. Fact Sheet 8 – Law Enforcement and Fire Protection Employees Under the Fair Labor Standards Act If you work for one of those small departments, any overtime your employer pays is not FLSA-required and does not qualify.
The Dollar Cap and the Income Phase-Out
Two limits work at the same time. The maximum deduction is $12,500 per year, or $25,000 for married couples filing jointly. On top of that, the deduction phases out once modified adjusted gross income passes $150,000 for a single filer or $300,000 for joint filers.5Internal Revenue Service. One Big Beautiful Bill Act – Tax Deductions for Working Americans and Seniors The higher your income above that line, the smaller the deduction.
Employees classified as “highly compensated” under the tax code cannot claim the deduction at all, regardless of how much overtime they worked. Most line firefighters will not run into that ceiling, but chiefs and senior officers should check their total compensation before assuming they qualify. You also need a work-eligible Social Security number to claim it, and the deduction is scheduled to expire after 2028 unless Congress extends it.6Ways and Means Committee. The One Big Beautiful Bill Section by Section
What Still Gets Taxed
The deduction reduces federal income tax only. Social Security tax at 6.2% and Medicare tax at 1.45% still come out of every overtime dollar. Your department will keep withholding FICA on overtime checks exactly as before.
State income tax is a separate question. The federal deduction does nothing to your state return unless your state has passed its own overtime break. A few states have, but the details vary, and some limit the exempt amount to a few thousand dollars a year or restrict it to public-safety workers. If your state has no such law, your overtime stays fully taxable at the state level even though part of it is deductible federally.
How It Shows Up on Your Paycheck and W-2
Starting with the 2026 tax year, employers have to report qualified overtime compensation separately on your W-2, in Box 12 under a new code TT. That figure tells you and the IRS exactly how much of your pay is eligible for the deduction.
Payroll systems have to track FLSA-required overtime apart from other overtime. For a firefighter on a 207(k) schedule, the system needs to identify which hours cross the applicable threshold and calculate the premium half of those hours. Your withholding does not change automatically. Federal income tax, FICA, and any state tax still come out of each check based on your W-4. The deduction reduces the tax you owe when you file, not what leaves your paycheck, unless you update your W-4.
The IRS has released a revised 2026 Form W-4 with a worksheet for employees who receive overtime. If you would rather see the benefit in your paychecks during the year instead of as a refund in April, that worksheet is where you adjust your withholding.
Claiming It on Your Return
You can take the deduction whether you itemize or claim the standard deduction.2Internal Revenue Service. What to Know About the No Tax on Overtime Deduction For 2026 and after, the amount in Box 12 code TT on your W-2 is your starting point, and you enter it on the appropriate line of your return so it reduces your adjusted gross income.
If your employer did not give you a separate statement of qualified overtime compensation, the IRS says to use the Schedule 1-A Instructions to figure it yourself.2Internal Revenue Service. What to Know About the No Tax on Overtime Deduction That situation is most likely for the 2025 tax year, since the code TT reporting requirement did not take effect until 2026. Hold on to your pay stubs so you can verify overtime hours and rates if you need to.
What It Actually Saves You
Your actual savings depend on your marginal federal tax rate, which for 2026 ranges from 10% to 37%.7Internal Revenue Service. Federal Income Tax Rates and Brackets A firefighter in the 22% bracket who claims the full $12,500 deduction saves about $2,750 in federal income tax. In the 12% bracket, the same deduction saves about $1,500. Multiply your qualified overtime, capped at $12,500, by your marginal rate.
Because only the premium half counts, most firefighters will not hit the $12,500 cap. Take a firefighter with a $35 base rate who works 500 overtime hours at time-and-a-half. Total overtime pay is $26,250, but only the extra half at $17.50 per hour is qualified, which comes to $8,750. At a 22% marginal rate, that deduction saves about $1,925.