How the deduction works
For tax years 2025 through 2028, workers can deduct qualified overtime compensation on their federal income tax return. It is a deduction, not a tax-free paycheck: overtime is still taxed on each cheque, and you get the benefit when you file, using Schedule 1-A.
- Only the premium counts. If you earn $30 an hour and $45 for overtime, only the extra $15 per overtime hour is deductible. The calculator above multiplies half your regular rate by your overtime hours.
- Only federally required overtime counts. That means overtime the Fair Labor Standards Act requires: hours over 40 in a workweek for non-exempt employees. Overtime paid only because of a state law (such as California daily overtime), a union contract or company policy does not qualify, and neither does the extra half of double time.
- Yearly cap: $12,500, or $25,000 on a joint return.
- Income phase-out: the cap shrinks by $100 for every $1,000 of modified adjusted gross income over $150,000 ($300,000 joint).
- Who can claim it: you need a valid Social Security number, and married couples must file jointly. You can claim it whether you itemize or take the standard deduction.
Worked example
Maria earns $30 an hour and works 46 hours a week, 50 weeks a year. That is 6 overtime hours × 50 weeks = 300 hours. Her premium is $15 × 300 = $4,500. She is single with an income of $75,000, under the $150,000 threshold, so she can deduct the full $4,500. In the 12% bracket that saves her about $540 in federal income tax.
What it does not change
The deduction lowers federal income tax only. Social Security and Medicare are still taken from all overtime pay, and your state may or may not follow the federal rule. It does not change how much overtime you are owed, which is still set by the FLSA, your state and your contract.
Where to find your number
Starting with 2026 pay, employers report qualified overtime on your W-2 in box 12 with code TT, and you cannot claim more than that amount. For 2025, employers did not have to report it separately, so the IRS lets you work it out from pay stubs and time records. A time card that splits regular and overtime hours week by week, like the one our calculator makes, is exactly that record.
Sources: IRS: What to know about the No Tax on Overtime deduction · US Department of Labor: Overtime Pay
Questions
Is overtime tax-free now?
No. Overtime is still taxed on your paycheck. From 2025 to 2028 you can deduct the overtime premium (the extra half of time-and-a-half) on your federal tax return, up to $12,500 a year or $25,000 for a joint return.
Does double time count for the no tax on overtime deduction?
Only the part the federal FLSA requires counts: half your regular rate for hours over 40 in a week. The extra paid under a union contract or state double-time rule does not qualify.
Does California daily overtime qualify?
Not on its own. Overtime paid only because of a state rule, such as hours over 8 in a day when you stay under 40 for the week, is not federally required overtime, so it does not count.
Does the deduction lower Social Security and Medicare tax?
No. It only lowers federal income tax. Social Security and Medicare are still withheld from all of your overtime pay.