No Tax on Overtime: How It Works and Who Qualifies

Under the One Big Beautiful Bill Act signed on July 4, 2025, the federal “no tax on overtime” rule lets eligible workers deduct their overtime premium from taxable income for tax years 2025 through 2028, wiping out federal income tax on that portion of their pay.¹ The deduction caps at $12,500 for single filers and $25,000 for joint filers, and it phases out at higher incomes. It does not eliminate Social Security or Medicare tax on overtime, and it doesn’t cover every dollar you earn during overtime hours.

What the Deduction Actually Covers

Only the overtime premium qualifies, not your full overtime paycheck. If your regular rate is $20 an hour and you earn $30 at time-and-a-half, the deductible amount is the extra $10 per hour. The base $20 you earn for each overtime hour is taxed like the rest of your wages.²

The statute defines “qualified overtime compensation” as pay required under Section 7 of the Fair Labor Standards Act that exceeds your regular rate.¹ So for someone working 50 hours in a week at a $20 regular rate, the qualifying amount is $100 (10 hours times the $10 premium), not the $300 earned during those extra hours.

Mechanically, this is a deduction, not an exclusion. The overtime premium still appears in your gross income, and you subtract it when calculating taxable income. You can claim it whether or not you itemize.³

Who Qualifies

Eligibility runs through the Fair Labor Standards Act. Only workers entitled to overtime pay under FLSA Section 207, which requires at least one and a half times the regular rate for hours beyond 40 in a workweek, can claim the deduction.⁴ The premium has to be reported on a W-2 or Form 1099.⁵

Salaried employees classified as exempt under the FLSA generally can’t claim it, because they don’t receive overtime in the first place. The executive, administrative, and professional exemptions apply to workers in those roles earning at least the minimum salary threshold, currently $684 per week ($35,568 per year).⁶⁷ If you earn below that threshold and aren’t in a listed exempt role, you’re almost certainly non-exempt and eligible for the deduction.

Three additional rules come straight from the statute:¹

You must include a valid Social Security number on your return.
If you’re married, you have to file jointly. Filing separately disqualifies you.
Tips don’t count. Qualified tips have their own separate deduction under Section 224 and can’t also be claimed here.

Dollar Caps and Income Phase-Outs

The deduction is limited to $12,500 for single filers and $25,000 for joint filers, no matter how much overtime premium you earned.¹ The tax savings depend on your bracket. A single filer in the 22% bracket who maxes out the $12,500 deduction saves about $2,750; a joint filer at that bracket saves roughly $5,500. Most eligible workers land somewhere in the 12% to 24% range, so realistic annual savings for a single filer hitting the cap runs between about $1,500 and $3,000.⁸

The deduction also shrinks as income climbs. It phases out by $100 for every $1,000 your modified adjusted gross income exceeds $150,000, or $300,000 for joint filers.² A single filer with MAGI of $275,000 or more gets nothing; the deduction disappears entirely for joint filers at $550,000. Most workers who regularly earn overtime aren’t near those thresholds.

Social Security and Medicare Tax Still Apply

The overtime deduction touches federal income tax only. Social Security and Medicare taxes still come out of every dollar of overtime pay, including the premium. The employee share is 6.2% for Social Security (on wages up to $184,500 in 2026) plus 1.45% for Medicare, a combined 7.65%.⁹¹⁰

Two consequences follow. Your take-home overtime pay won’t jump as dramatically as “no tax on overtime” sounds; a $10-per-hour premium still loses about 77 cents an hour to FICA. And because FICA is still collected, those earnings keep counting toward your Social Security benefit calculation. You don’t give up future retirement credit by claiming the deduction.

Seeing the Benefit During the Year vs. at Tax Time

Payroll withholding on paychecks with heavy overtime has always looked steep, because the system treats a single paycheck as though you’ll earn that amount every period. The new deduction doesn’t change automatic withholding. To feel it in your paycheck rather than as a refund next spring, file an updated Form W-4 with your employer. The IRS has a deductions worksheet for this: estimate your expected qualified overtime for the year and enter the amount in Step 4(b), and your employer will reduce withholding on future paychecks.¹¹

Be conservative if your hours swing. Overestimating leads to a bill at filing time.

Claiming It on Your Tax Return

You claim the deduction on your annual federal return. It appears on Schedule 1 of Form 1040. For tax year 2025, interim rules apply because employers weren’t required to separately report qualified overtime on W-2s before the law took effect mid-year. The IRS lets you use pay stubs, earnings statements, or similar documentation and reasonable methods to calculate the premium.¹²

One shortcut the IRS described: if your pay stub shows an aggregate dollar amount for overtime hours at time-and-a-half (regular rate plus premium combined), take one-third of that amount as your qualified overtime. If the stub shows $3,000 in total overtime pay at 1.5x, your deductible premium is $1,000.¹²

Beginning with tax year 2026, employers must separately report qualified overtime compensation on Form W-2, which will make the number easier to find.¹³

State Income Tax Isn’t Automatically Reduced

The federal deduction doesn’t necessarily lower your state income tax. Whether your state honors it depends on how the state’s tax code conforms to federal law. Some states adopt federal changes automatically, some conform as of an older fixed date, and some start from federal taxable income (in which case the deduction flows through). Nine states levy no personal income tax at all: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. Workers there feel the federal deduction with no state complication. Everyone else should check with their state tax agency or a tax professional.

The Deduction Expires After 2028

Section 225 has a sunset provision: no deduction is allowed for any taxable year beginning after December 31, 2028.¹ That gives four eligible tax years: 2025, 2026, 2027, and 2028. Congress could extend it, but plan on the current expiration date and treat any extension as a bonus.

1
Office of the Law Revision Counsel. 26 USC 225 – Qualified Overtime Compensation
2
Internal Revenue Service. One, Big, Beautiful Bill Act – Tax Deductions for Working Americans and Seniors
3
Office of the Law Revision Counsel. 26 USC 63 – Taxable Income Defined
4
Office of the Law Revision Counsel. 29 US Code 207 – Maximum Hours
5
Internal Revenue Service. Treasury, IRS Issue FAQs to Address the New Deduction for Qualified Overtime Compensation Under the One Big Beautiful Bill
6
U.S. Department of Labor. Fact Sheet 17A – Exemption for Executive, Administrative, Professional, Computer and Outside Sales Employees Under the Fair Labor Standards Act
7
U.S. Department of Labor. Earnings Thresholds for the Executive, Administrative, and Professional Exemptions
8
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026, Including Amendments From the One Big Beautiful Bill
9
Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates
10
Social Security Administration. Contribution and Benefit Base
11
Internal Revenue Service. How to Update Withholding to Account for Tax Law Changes for 2025
12
Internal Revenue Service. Guidance for Individual Taxpayers Who Received Qualified Tips or Qualified Overtime Compensation in 2025
13
Internal Revenue Service. General Instructions for Forms W-2 and W-3