No tax on overtime started with the 2025 tax year. It covers qualified overtime pay received from January 1, 2025, and runs through the end of 2028. You claim it on your federal tax return, first on the 2025 return filed in 2026, using the new Schedule 1-A (IRS, FS-2026-04). It is a deduction of up to $12,500 a year ($25,000 for married couples filing jointly) for the overtime premium required by federal law, not a full exemption: Social Security, Medicare and in most cases state taxes still apply (26 U.S.C. § 225).
Below: the key dates, what counts as qualified overtime, a phase-out chart, a free calculator, worked examples, and what employers must do for 2026 W-2s under the latest IRS guidance from August 2026 (IRS, IR-2026-88).
No tax on overtime: key facts
| Question | Answer |
|---|---|
| When does it start? | Overtime received on or after January 1, 2025 (tax year 2025) |
| When does it end? | After the 2028 tax year, unless Congress extends it |
| What is deductible? | Only the overtime premium required by the FLSA, usually the "half" in time-and-a-half |
| How much? | Up to $12,500 a year, or $25,000 on a joint return |
| Income limit | Phases out above $150,000 MAGI ($300,000 joint): $100 less per $1,000 over |
| Who qualifies? | Non-exempt employees under the FLSA with a valid SSN; married couples must file jointly |
| How do you claim it? | Schedule 1-A, Part III, attached to Form 1040; you can claim it with the standard deduction |
| Are payroll taxes still due? | Yes. Social Security, Medicare and income tax withholding still apply |
| Employer reporting | From 2026, on Form W-2 in box 12 with code TT |
No tax on overtime calculator
No tax on overtime calculator
Estimate your deduction and federal income tax saving for one tax year.
When does no tax on overtime start and end? Key dates
| Date | What happens |
|---|---|
| July 4, 2025 | The One Big Beautiful Bill Act creates the deduction (section 225 of the tax code) |
| January 1, 2025 | Start of the first tax year covered: qualified overtime received from this date counts, even though the law was signed in July |
| Early 2026 | Workers claim the 2025 deduction on Schedule 1-A. Employers did not have to report qualified overtime separately for 2025, so many workers work it out from pay stubs |
| August 6, 2026 | The IRS publishes updated FAQs (FS-2026-13) with the rules for 2026 to 2028 |
| Early 2027 | 2026 W-2s show qualified overtime in box 12, code TT. Employees use that figure to claim the deduction |
| December 31, 2028 | Last day of the last covered tax year. No deduction for later years unless Congress extends it |
Sources: (26 U.S.C. § 225), (IRS, 2026), (IRS, FS-2026-13).
What counts as qualified overtime?
Qualified overtime compensation is the overtime pay required under section 7 of the Fair Labor Standards Act (FLSA) that is more than your regular rate (26 U.S.C. § 225). In practice, that is the extra half-time pay for hours over 40 in a workweek. Your regular pay for those hours is still fully taxable.
The IRS is strict about the word "required". Overtime that goes beyond what the FLSA demands, such as double time, daily overtime under a state law, or extra pay under a union contract or company policy, does not count. Only the amount minimally necessary to satisfy the FLSA qualifies (IRS, FS-2026-13).
| Situation | Does it qualify? |
|---|---|
| Time-and-a-half for hours over 40 in a week | Yes, the half-time premium |
| Regular rate paid for the overtime hours | No, it stays taxable |
| Double time for hours over 40 | Only the half-time part the FLSA requires |
| Daily overtime required only by state law (for example, over 8 hours a day) | No |
| Overtime under a union contract or employer policy beyond the FLSA | No, only the FLSA-required part |
| Exempt salaried employees (not entitled to FLSA overtime) | No |
| Owners with 20% or more who actively manage the business | Generally no, treated as exempt executives |
Sources: (IRS, FS-2026-13). Not sure whether a role is exempt or non-exempt? Our guide to employment contract types explains how employment arrangements differ.
Caps and phase-out chart
The deduction is capped at $12,500, or $25,000 on a joint return. Above $150,000 of modified adjusted gross income ($300,000 joint), the deduction drops by $100 for each $1,000 over the threshold (26 U.S.C. § 225). The chart shows the largest deduction still available at each income level.
| Modified AGI | Single: max deduction | Modified AGI | Joint: max deduction |
|---|---|---|---|
| $150,000 or less | $12,500 | $300,000 or less | $25,000 |
| $175,000 | $10,000 | $350,000 | $20,000 |
| $200,000 | $7,500 | $400,000 | $15,000 |
| $225,000 | $5,000 | $450,000 | $10,000 |
| $250,000 | $2,500 | $500,000 | $5,000 |
| $275,000 or more | $0 | $550,000 or more | $0 |
If your qualified overtime is below the cap, the reduction applies to your actual amount, so the deduction runs out sooner. The calculator above does this for you.
No tax on overtime examples
Example 1: hourly worker below the income limit
- Single, modified AGI $85,000
- Regular rate $25 an hour, 250 FLSA overtime hours in the year
- Qualified premium: 250 × $25 × 0.5 = $3,125
- Below the $150,000 threshold, so the full $3,125 is deductible
- At a 22% bracket, that saves about $687 in federal income tax
Example 2: paid double time
- An employee works 50 hours in a week at $20 an hour and is paid double time for the 10 extra hours
- The FLSA only requires a half-time premium: 10 × $20 × 0.5 = $100
- Only that $100 is qualified overtime, even though the employer paid $200 above the regular rate
This is the IRS's own example (IRS, FS-2026-13).
Example 3: married couple in the phase-out range
- Married filing jointly, modified AGI $400,000
- Combined qualified premium: $18,000 (below the $25,000 cap)
- $100,000 over the $300,000 threshold, so the deduction drops by $10,000
- Deduction: $18,000 − $10,000 = $8,000
These examples are illustrations. Your actual saving depends on your full tax return.
Who qualifies for no tax on overtime?
- You are a non-exempt employee who is owed overtime under the FLSA.
- You have a valid Social Security number, and include it on your return.
- If you are married, you file a joint return.
- Your modified AGI is below $275,000 ($550,000 joint), or the deduction phases out to zero.
- You do not need to itemize: the deduction is available with the standard deduction too.
Sources: (26 U.S.C. § 225), (IRS, 2026).
How to claim the deduction
For 2025 (returns filed in 2026)
Use Schedule 1-A, Part III "No Tax on Overtime", and attach it to Form 1040. The total from Schedule 1-A goes on Form 1040, line 13b (IRS, FS-2026-04). Employers did not have to report qualified overtime separately for 2025, so if you did not get a statement, the IRS says to work out the amount with the Schedule 1-A instructions (IRS, 2026). Pay stubs that show overtime hours and rates help.
For 2026 to 2028
Your W-2 will show qualified overtime in box 12 with code TT. From 2026, you generally cannot claim more than the amount your employer reports. If the amount is missing or too low, ask your employer for a corrected Form W-2c (IRS, FS-2026-13).
Is overtime still taxed?
- Federal income tax: Your overtime is still taxed and withheld from each paycheck. The deduction lowers your taxable income when you file, which usually means a bigger refund or a smaller bill.
- Social Security and Medicare: Still due on all overtime pay. The deduction does not change employment taxes.
- State income tax: This is a federal deduction. Check whether your state follows it.
Want the saving in your paychecks instead of a refund? You can give your employer a new Form W-4 that estimates the deduction. Employers may not reduce withholding for it on their own (IRS, FS-2026-13).
What employers need to do
For 2026, the deduction becomes a payroll reporting task. The IRS FAQs set out the main duties (IRS, FS-2026-13):
- Check FLSA classifications. Only non-exempt employees can have qualified overtime, so make sure each role is classified correctly.
- Track the FLSA premium separately. Payroll needs the regular rate and the half-time premium required by the FLSA, apart from any double time, state-law or contract overtime.
- Report it on 2026 W-2s. Put qualified overtime in box 12 with code TT. Report the full amount even if it is above the employee's $12,500 cap.
- Correct mistakes with Form W-2c. Employees can no longer rely on their own records from 2026, and uncorrected reporting errors can lead to penalties.
- Leave withholding alone unless an employee updates Form W-4. Collect new W-4s through payroll, and include the form in your new hire onboarding checklist.
- Tell employees what to expect. A short note on what counts, what does not, and where to find code TT saves HR many questions in tax season.
No Tax on Overtime: FAQ
It applies from the 2025 tax year, so qualified overtime received on or after January 1, 2025 counts. You claim it on your federal return, starting with the 2025 return filed in 2026. It ends after the 2028 tax year unless Congress extends it.
Often, yes. Employers still withhold federal income tax on overtime, so the deduction usually shows up as a larger refund or a smaller amount owed when you file. You can get the benefit earlier by giving your employer an updated Form W-4.
It is a federal income tax deduction for the overtime premium required by the FLSA, usually the half in time-and-a-half. It is capped at $12,500 ($25,000 joint) and phases out above $150,000 of modified AGI ($300,000 joint). You claim it on Schedule 1-A.
Yes. Overtime is still subject to Social Security, Medicare and federal income tax withholding, and usually state tax. The deduction only lowers the federal income tax you owe when you file.
Only partly. The IRS counts only the premium the FLSA requires, which is half the regular rate for hours over 40 in a week. The rest of a double-time payment is not qualified overtime.
Only if they are non-exempt and owed overtime under the FLSA. Exempt salaried employees are not entitled to FLSA overtime, so they do not have qualified overtime.
No. The deduction is available whether you itemize or take the standard deduction.
From tax year 2026, employers report qualified overtime compensation on Form W-2 in box 12 using code TT. Employees use that amount to claim the deduction.
Sources
- 26 U.S.C. § 225, Qualified overtime compensation (Cornell LII): law.cornell.edu
- IRS, One Big Beautiful Bill Act: tax deductions for working Americans and seniors (FS-2025-03, July 2025): irs.gov
- IRS, What to know about the No Tax on Overtime deduction (March 2026, updated September 2026): irs.gov
- IRS, Schedule 1-A, Additional Deductions: what to know about the new form (FS-2026-04, March 2026): irs.gov
- IRS, IRS updates FAQs on qualified overtime deduction (IR-2026-88, August 6, 2026): irs.gov
- IRS, Qualified overtime compensation FAQs (FS-2026-13, August 2026): irs.gov
