Overtime pay is taxed as ordinary income at the federal level. Every dollar of overtime lands in the same pool as your regular wages and moves through the same tax brackets. There is no special higher rate for working extra hours. Starting with tax year 2025, a new federal deduction lets eligible workers subtract up to $12,500 in qualified overtime pay from taxable income ($25,000 for joint filers), but the deduction is temporary, capped, income-limited, and does not touch Social Security or Medicare taxes. Here is how overtime pay is taxed in practice, and what the new rule actually changes.
Overtime Is Ordinary Income
Federal law requires employers to pay non-exempt workers at least one and a half times their regular rate for hours worked beyond 40 in a workweek.1Office of the Law Revision Counsel. 29 USC 207 – Maximum Hours That premium makes the paycheck bigger. It does not create a separate tax category. The IRS treats all compensation for services, including overtime, as gross income.2Office of the Law Revision Counsel. 26 USC 61 – Gross Income Defined
The federal income tax is progressive: only the dollars that fall inside a given bracket are taxed at that bracket’s rate.3eCFR. 26 CFR 1.1-1 – Income Tax on Individuals For 2026, a single filer pays 10 percent on the first $12,400 of taxable income, 12 percent on income up to $50,400, and 22 percent on income up to $105,700.4Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 If overtime pushes you into the 22 percent range, only the portion above $50,400 is taxed at 22 percent. Everything below stays at the lower rates.
Why Overtime Paychecks Look Overtaxed
The belief that overtime is punished by the tax code usually traces back to how paychecks are withheld, not how they are taxed. Employers follow IRS Publication 15-T, and two common withholding methods make the tax bite on an overtime check look larger than it really is.
The first is the aggregate method. When overtime is bundled into a normal paycheck, payroll software adds the overtime in, then calculates withholding as if you earned that inflated amount every pay period for the whole year. A $1,500 weekly check that jumps to $2,200 with overtime gets withheld as though your annual pay were $114,400 rather than $78,000. The result is a bigger federal tax line on that specific stub.
The second is the flat-rate method for supplemental wages. When overtime is broken out separately, the employer can withhold a flat 22 percent on the overtime portion. A worker whose actual marginal rate is 12 percent will see 10 extra percentage points come out of that check.
Either way, over-withholding comes back as a refund at filing. Your annual tax liability is the same either way; only the timing changes. Workers who regularly earn overtime and would rather have the money in each check can adjust Form W-4. The 2026 version includes a Deductions Worksheet where line 1b takes an estimate of qualified overtime compensation, which then flows into Step 4(b) and reduces withholding.5Internal Revenue Service. Form W-4 (2026)
Social Security and Medicare Still Apply
Separate from income tax, every dollar of overtime is subject to FICA. You pay 6.2 percent toward Social Security and 1.45 percent toward Medicare, and your employer matches both.6Office of the Law Revision Counsel. 26 USC 3101 – Rate of Tax The new overtime deduction does not touch FICA. Even overtime that qualifies for the income tax deduction is fully subject to Social Security and Medicare withholding.
Social Security tax stops once your total earnings for the year hit the wage base cap, $184,500 in 2026.7Social Security Administration. Contribution and Benefit Base After that, the 6.2 percent disappears from your remaining paychecks. Medicare has no cap. If your total Medicare wages pass $200,000 for a single filer or $250,000 filing jointly, an additional 0.9 percent Medicare tax applies to the amount above that threshold.8Internal Revenue Service. Topic No. 560, Additional Medicare Tax Employers begin withholding the additional Medicare tax once your wages pass $200,000 in a calendar year, regardless of filing status.
The New Federal Overtime Deduction
The One Big Beautiful Bill, signed on July 4, 2025, created a new deduction under Internal Revenue Code Section 225. Eligible workers can subtract qualified overtime compensation from federal taxable income for tax years 2025 through 2028. This is a deduction, not an exemption. You still report the overtime as income, then subtract the qualifying portion on your return.
The deduction is capped at $12,500 on a single return and $25,000 on a joint return.9Internal Revenue Service. Schedule 1-A (Form 1040) 2025 It phases out for higher earners: the benefit shrinks and eventually disappears once modified adjusted gross income passes $150,000 for single filers or $300,000 for joint filers.10Internal Revenue Service. Guidance for Individual Taxpayers Who Received Qualified Tips or Qualified Overtime Compensation in 2025 (Notice 2025-69) Two threshold rules can disqualify you outright: your return must include a valid Social Security number, and married taxpayers must file jointly.
What Counts as Qualified Overtime
Only the premium portion qualifies. On time-and-a-half, the “half” is what counts, not the full overtime hour. A worker whose regular rate is $30 and who earns $45 per overtime hour has $15 per hour of qualified overtime compensation.11Internal Revenue Service. One, Big, Beautiful Bill: How to Take Advantage of No Tax on Tips and Overtime
The overtime must also be required by the federal Fair Labor Standards Act, which means it must be paid to a worker who is both covered by the FLSA and not exempt from its overtime rule.12Internal Revenue Service. Questions and Answers About the New Deduction for Qualified Overtime Compensation The FLSA has many exemptions tied to salary level, job duties, and occupation. Salaried managers, many professionals, outside salespeople, and certain computer employees are commonly classified as exempt. If federal law does not require your employer to pay you overtime, any overtime you do receive, whether through a union contract or state law, does not qualify for the deduction.
What Does Not Qualify
- Double-time and holiday pay. Amounts above the FLSA-required time-and-a-half premium are not qualified overtime.
- State-only overtime. Some states require overtime for daily hours over eight or for work on certain days. If that overtime is not also required by the FLSA’s 40-hour weekly rule, it does not count.
- Union contract premiums. Collective bargaining terms that trigger overtime at 35 hours or use daily triggers go beyond the FLSA, and the extra premium is not deductible.
- Overtime paid to FLSA-exempt employees. A salaried exempt worker whose employer voluntarily pays overtime cannot claim the deduction, regardless of hours worked.12Internal Revenue Service. Questions and Answers About the New Deduction for Qualified Overtime Compensation
How to Claim It
The deduction is claimed on Schedule 1-A (Form 1040). Part III of that form walks through the math: qualified overtime from your W-2 or 1099 goes on line 14a or 14b, the form applies the cap and the income phase-out, and the final deduction amount lands on line 21.9Internal Revenue Service. Schedule 1-A (Form 1040) 2025 It is available whether you itemize or take the standard deduction.11Internal Revenue Service. One, Big, Beautiful Bill: How to Take Advantage of No Tax on Tips and Overtime
For tax year 2025, employers are not required to separately report qualified overtime. Some may list it voluntarily in box 14 of the W-2 or send a separate statement. If yours does not, you can calculate the amount using the methods in IRS Notice 2025-69 and the Schedule 1-A instructions.12Internal Revenue Service. Questions and Answers About the New Deduction for Qualified Overtime Compensation Starting with tax year 2026, employers are required to break qualified overtime out separately on updated W-2 and 1099 forms.
State and Local Taxes Still Apply
The federal deduction does not automatically flow to your state return. Each state decides on its own whether to conform to federal changes, and several have already chosen not to. Workers in non-conforming states continue paying state income tax on overtime in full. Local wage taxes in cities that impose them are also unaffected. Between FICA, state income tax, and any local tax, the actual take-home boost from the federal deduction is smaller than the “no tax on overtime” framing suggests. Check your own state’s guidance for the 2025 filing season, because the list of conforming and non-conforming states is still moving.
What the Deduction Is Actually Worth
The dollar value of the deduction depends on your federal bracket. A worker in the 12 percent bracket who claims the full $12,500 saves $1,500 in federal income tax. A worker in the 22 percent bracket saves $2,750 on the same amount. Meaningful, but a fraction of the overtime earned.
A concrete example: a single worker earning $45,000 in regular wages picks up an extra $10,000 in premium pay (the “half” of time-and-a-half) over the year. With MAGI well under the $150,000 phase-out, they can deduct the full $10,000. At a 12 percent marginal rate, that is roughly $1,200 in federal income tax saved. They still owe 6.2 percent Social Security and 1.45 percent Medicare on the overtime, plus any state and local income tax. The deduction helps. It does not make overtime tax-free.
Workers with income near the phase-out should look closely at Schedule 1-A lines 16 through 20, where the reduction is calculated.9Internal Revenue Service. Schedule 1-A (Form 1040) 2025 Earners above the phase-out ceiling get no benefit at all, and their overtime is taxed the same way it was before the law changed: as ordinary income, bracket by bracket, with FICA on top.