No Tax on Overtime Calculator

What Is the "No Tax on Overtime" Deduction?

The "No Tax on Overtime" provision is a federal income tax deduction enacted as part of the One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025. It allows eligible W-2 employees to deduct the premium portion of their qualified overtime pay from their federal taxable income for tax years 2025 through 2028.

It is important to understand what this is — and what it is not. This is a deduction, not a full exemption. It reduces your taxable income, which reduces your tax bill by the deduction amount multiplied by your marginal tax rate. It is not a dollar-for-dollar tax credit, and it does not eliminate all taxes on overtime pay.

How Much Can You Deduct?

The maximum annual deduction depends on your filing status:

• Single or Head of Household: up to $12,500 per year
• Married Filing Jointly: up to $25,000 per year
• Married Filing Separately: $0 — not eligible at all

These caps apply to qualified overtime premium pay — not your total overtime earnings (see below for details on the premium-only rule).

The deduction also phases out at higher incomes. If your Modified Adjusted Gross Income (MAGI) exceeds $150,000 (single/HOH) or $300,000 (MFJ), the deduction is reduced by $100 for every $1,000 of MAGI above the threshold. This is a gradual linear reduction, not a cliff.

Worked example: A single filer with $200,000 MAGI and $10,000 in qualified overtime premium pay:

• Excess MAGI: $200,000 − $150,000 = $50,000
• Reduction: ($50,000 ÷ $1,000) × $100 = $5,000
• Deduction: $10,000 − $5,000 = $5,000
• At a 32% marginal rate, estimated tax savings: $5,000 × 0.32 = $1,600

Single and HOH filers are fully phased out at MAGI of $275,000 or above. MFJ filers are fully phased out at $550,000 or above.

What Actually Qualifies — and What Doesn't

This is where most of the confusion lies. The deduction only applies to:

• The premium portion of overtime pay — the "half" in "time and a half." If your base rate is $20/hr and your OT rate is $30/hr, only the extra $10/hr qualifies, not the full $30.
• Overtime that qualifies under the federal Fair Labor Standards Act (FLSA) — meaning hours actually worked beyond 40 in a single workweek.

What does not qualify:

• State-mandated daily overtime does not qualify. California's 8-hour daily OT rule, Alaska's daily rule, and similar state provisions create overtime under state law, but this federal deduction only recognizes the 40-hour/week FLSA threshold. If your overtime hours are only "overtime" because of a state daily rule and you didn't exceed 40 hours in the week, they do not qualify. See our daily vs. weekly overtime guide for details on which states have daily OT rules.
• Union contract overtime that doesn't independently satisfy the FLSA 40-hour rule.
• PTO, holiday pay, and other non-worked hours do not count toward the 40-hour threshold, even if your employer pays a premium rate for them. See our PTO and overtime guide for a full breakdown of what counts as "hours worked."
• Independent contractors and gig workers are not eligible — this is for W-2 employees only.
• Salaried-exempt employees are generally not eligible since they don't earn FLSA overtime.
• Married Filing Separately filers receive no deduction regardless of income.

How to Calculate Your Deduction If Your Pay Stub Doesn't Break It Out

For tax year 2025, most employers are not yet required to separately report qualified overtime compensation on the W-2. Some may show an estimate in Box 14, but many workers will need to calculate their own deductible amount from pay stubs.

If you know your overtime multiplier, the math is straightforward:

• At 1.5x (time and a half): the premium portion is one-third of your total overtime pay. If your total OT earnings for the year were $15,000, the qualified premium is $5,000.
• At 2.0x (double time): the FLSA premium portion is one-quarter of your total overtime pay.

Beginning with tax year 2026, the W-2 is expected to include a dedicated reporting code (Box 12, Code TT) for qualified overtime compensation, making this much easier going forward.

If your pay rate changed during the year, you'll need to calculate the premium separately for each rate period and add them together — see our overtime after a raise guide for a step-by-step walkthrough.

For 2025 specifically, the IRS allows employers to use a "reasonable method" including a safe-harbor approach that estimates qualifying overtime by averaging hours from July through December 2025, since the law took effect mid-year.

This Deduction Doesn't Eliminate All Overtime Taxes

The deduction reduces your federal income tax only. It does not reduce Social Security or Medicare (payroll) taxes, which are still owed on all overtime pay. It also may not reduce your state income tax, depending on whether your state conforms to this federal provision. There is no special lower tax rate for overtime — the deductible amount simply reduces your taxable income, and the actual cash benefit depends on your marginal tax bracket.

When Does This Expire?

The No Tax on Overtime deduction is currently authorized for tax years 2025 through 2028. It will expire after the 2028 tax year unless Congress extends it through new legislation.

Frequently Asked Questions

Do I need to itemize to claim this deduction?

No. The deduction is available whether you take the standard deduction or itemize. It is a "below-the-line" deduction claimed on the new IRS Schedule 1-A and flows to Form 1040.

What tax form do I use?

File the new Schedule 1-A with your Form 1040.

I'm self-employed — do I qualify?

No. This deduction is for W-2 employees only. Self-employed individuals and independent contractors are not eligible.

I'm a salaried exempt employee who occasionally gets a bonus for extra hours — does that count?

Generally no. The deduction requires true FLSA non-exempt overtime — hours actually worked beyond 40 in a workweek by a non-exempt employee. Discretionary bonuses or extra compensation for exempt employees typically do not qualify.

Does my state conform to this deduction?

It varies. Some states automatically conform to federal deductions while others decouple. Check with your state tax authority or a tax professional to determine whether this deduction reduces your state income tax as well.

Related Guides

• Overtime Pay Calculator — calculate your regular overtime pay using the homepage calculator
• Daily vs. Weekly Overtime — understand which overtime rules apply in your state, and why state daily OT does not qualify for this deduction
• Overtime After a Raise — how to handle the deduction calculation when your pay rate changed mid-year
• Does PTO Count Toward Overtime? — PTO and holiday pay don't count toward the 40-hour threshold that determines qualifying overtime

This calculator provides simplified estimates based on publicly available IRS and Treasury guidance at the time of writing. Tax law is complex and subject to change. Your actual eligibility and deduction amount may differ based on your complete financial and filing situation. Consult a qualified tax professional or refer to current IRS guidance before filing.