No Tax on Overtime: How the Deduction Really Works

The short answer

"No tax on overtime" is the popular name for a new federal income tax deduction for qualified overtime compensation, available for 2025 through 2028. It is narrower than the name suggests:

• Only overtime required by the federal Fair Labor Standards Act (FLSA) qualifies.
• Only the premium above your regular rate counts — generally the "half" in time-and-a-half, not the whole overtime paycheck.
• The deduction is capped at $12,500 ($25,000 on a joint return) and shrinks when modified adjusted gross income (MAGI) is over $150,000 ($300,000 joint).

Overtime pay is still income and is still subject to Social Security and Medicare taxes. The deduction lowers only the income subject to federal income tax.

Who qualifies

• You (or your spouse, on a joint return) received qualified overtime compensation during the year as an FLSA overtime-eligible employee — covered by the FLSA and not exempt from its overtime requirement.
• The person who received the overtime has a Social Security number valid for employment, issued before the due date of the return (including extensions).
• If you are married, you file a joint return.
• You can take the standard deduction or itemize — either way works.

Many workers are exempt from FLSA overtime — for example, many executive, administrative, and professional employees, outside sales employees, and certain computer-related, commissioned retail, transportation, seasonal, and agricultural workers. The IRS FAQs also say an employee who owns at least a bona fide 20% equity interest in the business and actively manages it is generally exempt. If you are FLSA-exempt, overtime paid under a union contract, a state law, or your employer's own policy does not qualify.

Only the overtime premium counts

Under the FLSA, overtime is generally paid at one and one-half times your regular rate for hours over 40 in a workweek. The qualified amount is the extra half, not the full time-and-a-half. A quick way to estimate it: if all your overtime was paid at exactly time-and-a-half, the qualified amount is one-third of your total overtime pay.

The limit and the income phaseout

Examples (illustrative)

Carlos (single, 2025) is an hourly warehouse worker earning $24 an hour. He received $9,000 of overtime pay during 2025, all at time-and-a-half. His qualified overtime compensation is $9,000 ÷ 3 = $3,000. His MAGI is under $150,000, so he can deduct the full $3,000 on Schedule 1-A.

Ana and Leo (married filing jointly, 2025) have $20,000 of qualified overtime compensation between them and MAGI of $320,000. The starting amount is $20,000 (under the $25,000 joint limit). Their MAGI is $20,000 over $300,000, so the deduction is reduced by 20 × $100 = $2,000. They can deduct $18,000.

Priya (2026) was paid $10,000 of qualified overtime, but her 2026 Form W-2 shows only $5,000 in box 12, code TT. Following the IRS FAQs, she asks her employer for a corrected Form W-2c. If the employer issues one showing $10,000, she can use $10,000. If the employer does not correct it, the FAQs say she can use only the $5,000 reported.

2025 vs. 2026: how you find the amount

The amount in box 12, code TT is not automatically your deduction. Schedule 1-A applies the $12,500 / $25,000 limit and the income phaseout to figure the deductible amount.

Common misconceptions

• "All overtime is tax-free." Overtime remains taxable income subject to Social Security and Medicare taxes; only the qualified premium is deductible, up to the limit.
• "I can deduct my whole overtime paycheck." Only the FLSA-required premium above your regular rate counts.
• "Any overtime my employer pays qualifies." Overtime that the FLSA does not require — including for FLSA-exempt employees — does not qualify.
• "The box 12 amount is my deduction." It is the starting point; the limit and phaseout still apply.
• "Married couples get $25,000 each." The $25,000 joint limit is combined.