No Tax on Overtime Explained: Qualified Overtime Deduction Rules for 2025
Maximize your tax savings with this new deduction for qualified overtime pay. Available for the 2025 to 2028 tax years, this deduction can cut your taxable income by as much as $12,500 ($25,000 for joint filers). But the deduction is reduced if your income is above a certain amount. Learn how to claim this deduction and how it’ll impact your tax bill.
The One Big Beautiful Bill that passed includes permanently extending tax cuts from the Tax Cuts and Jobs Act, including increasing the cap on the amount of state and local or sales tax and property tax (SALT) that you can deduct, makes cuts to energy credits passed under the Inflation Reduction Act, makes changes to taxes on tips and overtime for certain workers, reforms Medicaid, increases the Debt ceiling, and reforms Pell Grants and student loans. Updates to this article are in process. Check our One Big Beautiful Bill article for more information.
Key Takeaways
- If you earn overtime pay at work, you may be able to deduct up to $12,500 of qualified overtime compensation on your federal income tax return (up to $25,000 for married people filing a joint return).
- The overtime deduction is gradually phased out – potentially to $0 – if your modified adjusted gross income exceeds $150,000 ($300,000 for joint filers).
- Despite the “No Tax on Overtime” label, the overtime deduction does not completely eliminate taxes on overtime pay. Some people may still owe federal and/or state income tax on their overtime pay, and payroll taxes still apply to it.
- The overtime deduction is temporary – it only applies for the 2025 to 2028 tax years.
What is “No Tax on Overtime” in the One Big Beautiful Bill?
The phrase “no tax on overtime” is used to describe a new tax deduction for qualified overtime compensation. This overtime deduction was enacted by the “One Big Beautiful Bill” (also known as the Working Families Tax Cut), which was signed into law on July 4, 2025. However, the deduction is temporary – it only applies for the 2025 through 2028 tax years.
Eligible workers can deduct up to $12,500 of overtime pay earned during the year (up to $25,000 for married couples filing a joint return). But if your income is more than a certain amount, the deduction is gradually phased out – potentially to $0.
Despite the “no tax on overtime” label, the deduction won’t completely eliminate taxes on all overtime pay. Yes, some people will pay no federal income tax on their overtime pay, but higher-income people may still owe income taxes on at least a part of the overtime compensation they receive. Plus, overtime pay is still subject to payroll taxes and, depending on where you live, maybe state or local income taxes, too.
TurboTax Tip:
Overtime wages are not exempt from Social Security and Medicare taxes for either the employee or the employer. Even if the overtime deduction applies, the employee's share of these taxes will still be withheld from their total wages, and the employer will match the employee's share and pay it all to the IRS." – Victoria Adams, EA, Aberdeen, WA
When does the “No Tax on Overtime” deduction start?
The “no tax on overtime” deduction is retroactively effective on January 1, 2025. So, if you qualify, you can claim the deduction for the first time on your federal income tax return for the 2025 tax year (which you’ll file in 2026). All qualified overtime pay earned from January 1 to December 31, 2025, can be used to calculate the deduction for the 2025 tax year.
However, the overtime deduction is currently set to expire after 2028. So, you only have four years to claim it (2025 to 2028). The deduction could be extended beyond 2028, but this would require passage of a new law.
Who qualifies for the overtime deduction?
You can deduct overtime pay on your federal income tax return only if you:
- are covered by and not exempt from the Fair Labor Standards Act (FLSA), which is the federal law that requires overtime pay for certain workers
- have a Social Security number that’s valid for employment and issued before the due date of your return (including extensions)
- don’t use the Married Filing Separately filing status
Note that being eligible for overtime pay under state law or receiving it for some other reason (such as under a collective bargaining agreement) isn’t enough to qualify for the deduction on its own. You still must satisfy the requirements listed above.
In addition, if you satisfy all the requirements, the overtime deduction is available whether you claim itemized deductions or the Standard Deduction on your return.
|
Quick Reference Guide to the Overtime Deduction |
|
|---|---|
|
Years Available |
2025 through 2028 tax years |
|
Amount of Deduction |
Up to $12,500 ($25,000 for joint filers) |
|
Type of Deduction |
Below-the-line |
|
Phaseout Range |
MAGI of $150,000 to $275,000 ($300,000 to $550,000 for joint filers) |
|
Filing Status Limitations |
No deduction if married filing separately |
|
Social Security Number |
Required (must be valid for employment) |
|
Deductible Portion of Overtime Pay |
“Half” portion of “time-and-a-half” pay |
|
Standard Deduction or Itemized Deductions |
Can claim either one |
|
Forms Required |
Schedule 1-A |
What is “qualified overtime” for purposes of the overtime deduction?
You can only claim the overtime deduction for “qualified overtime compensation,” which is overtime pay required under the FLSA that’s in excess of your regular rate of pay. According to the IRS, this is the “half” portion of the “time-and-a-half” pay required by the FLSA. This amount is also called the “overtime premium,” and it’s equal to 50% of your regular hourly pay if you’re paid time-and-a-half for overtime. For example, suppose you’re normally paid $20 per hour, but you receive $30 per hour for any overtime worked ($20 x 1.5 = $30). If you work extra hours, you can only deduct $10 of the $30 you receive for those hours ($20 x 0.5 = $10), since that’s the amount in excess of your regular pay (the overtime premium)."Qualified overtime compensation” does not include:
- tips eligible for the tip deduction
- overtime compensation that’s more than the time-and-a-half pay required by the FLSA
- extra pay for weekends or holidays, if the employee doesn’t work more than 40 hours during the week
- state mandated overtime pay to workers who aren’t eligible for overtime pay under the FLSA
Non-standard overtime compensation. The FLSA generally requires overtime pay at the time-and-a-half rate if you work more than 40 hours in a week. However, in certain cases, overtime compensation can be paid at a higher rate, based on something other than the standard 40-hour workweek, or converted to “comp time.”
For instance, a collective bargaining agreement, state law, or some other arrangement might require overtime compensation at twice your regular rate of pay (or some other amount above time-and-a-half). In these cases, compensation exceeding the FLSA-required overtime premium is not deductible.
Example: Cheri’s regular rate of pay is $20 per hour, but she receives twice that amount ($40 per hour) for any overtime worked. If Cheri works extra hours, she can only deduct $10 of the $40 she receives for those hours ($20 x 0.5 = $10). The additional $10-per-hour of overtime pay isn’t deductible.
In addition, time-and-a-half overtime for police officers and firefighters can be based on a “work period” of seven to 28 days, while hospitals and certain residential care facilities can enter into an agreement with their employees to pay it for any time worked over eight hours in a day or over 80 hours in a 14-day period. In these cases, the overtime premium is still deductible, even though overtime pay isn’t based on a standard 40-hour workweek.
Example: Charlie is a firefighter who is paid time-and-a-half overtime if he works more than 40 hours during a 14-day work period. His regular rate of pay is $40 per hour, but he receives $60 per hour for any overtime work ($40 x 1.5 = $60). If Charlie works extra hours, he can deduct $20 of the $60 he receives for those hours ($40 x 0.5 = $20).
The overtime deduction may also be available if you receive “comp time” – that is, paid time off from work – instead of more money when you work more than 40 hours in a week. In that case, your overtime premium is based on the amount you were paid while taking time off.
Example: Greyson’s regular rate of pay is $30 per hour. He receives one and one-half hours of paid time off for each hour worked over 40 during the week. For each hour and a half that Greyson gets off as comp time, he is paid $45 dollars ($30 x 1.5 = $45). If Greyson works extra hours, he can deduct $15 of the $45 he receives for each hour of overtime worked ($30 x 0.5 = $15).
How do I determine the amount of qualified overtime pay I received during the year?
For the 2025 tax year, your employer might report your qualified overtime compensation for the year in Box 14 of your W-2 form. You could also receive a separate statement reporting your overtime pay for the year (including if you’re self-employed). If that’s the case, you can rely on the reported amount to calculate the overtime deduction.
If your employer doesn’t use Box 14, or a separate statement reporting your overtime pay isn’t provided, you can use other records – such as earnings statements, pay stubs, invoices, or similar documents – to determine the amount of qualified overtime compensation you received in 2025 (keep those records with your other tax documents).
Also remember that you can only deduct the “overtime premium” portion of your total overtime pay – that is, the “half” portion of the “time-and-a-half” overtime pay required by the FLSA. As a result, if the total of all wages for overtime hours – the overtime premium, plus regular wages – is reported on a separate statement, you have to split out the overtime premium yourself.
If you’re paid time-and-a-half for overtime hours, divide the total reported amount by three to split out the overtime premium.
Example: Kay receives a separate statement from her employer reporting $24,000 of total compensation for overtime hours worked in 2025. Her overtime premium for the year is $8,000 ($24,000 ÷ 3 = $8,000).
This formula also works if you receive one and one-half hours of paid “comp time” for every hour of overtime worked.
Example: Harold receives one and one-half hours of paid comp time for each hour of overtime he works. He receives a separate statement from his employer reporting $15,000 of total compensation for overtime hours worked in 2025. Harold’s overtime premium for the year is $5,000 ($15,000 ÷ 3 = $5,000).
If you’re paid more than time-and-a-half for overtime hours – such as twice your regular pay – you must divide the total overtime amount reported for the year by some other appropriate amount to determine the overtime premium. Since you can only deduct FLSA-authorized overtime pay, the goal is to determine what the overtime premium would be if you were paid time-and-a-half for overtime hours.
Example: Dave is paid twice his regular hourly rate for overtime hours worked. He receives a separate statement from his employer reporting $28,000 of total compensation for overtime hours worked in 2025. He must divide this amount by four to determine his overtime premium for the year – which is $7,000 ($28,000 ÷ 4 = $7,000).
Note that if Dave was paid one and one-half times his regular rate for overtime (instead of twice the regular rate), his total overtime compensation for the year would be $21,000. In that case, the overtime premium would also be $7,000 ($21,000 ÷ 3 = $7,000).
Changes for the 2026 tax year. The IRS announced that Forms W-2, 1099-NEC, 1099-MISC, and 1099-K will be updated for the 2026 to 2028 tax years to include separate reporting of qualified overtime compensation. As a result, only overtime pay that’s separately reported on these forms will be deductible beginning with the 2026 tax year.
This will make it easier to determine your qualified overtime pay, since it will be clearly displayed right on the form. “However, you should still check the amounts provided to ensure you have the maximum benefit,” says Victoria Adams, an enrolled agent and TurboTax Expert based in Aberdeen, Wash.
How do I calculate the overtime deduction?
The overtime deduction can be as high as $12,500 ($25,000 for married couples filing a joint return), but it will be gradually reduced if your modified adjusted gross income (MAGI) is greater than $150,000 ($300,000 for joint filers).
If the phase-out is triggered, your deduction is reduced by $100 for each $1,000 of MAGI over the applicable threshold amount (although it can’t drop below $0). That means the deduction is reduced to $0 once your MAGI hits $275,000 ($550,000 for joint filers).
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Overtime Deduction Phase-Out Chart |
|||
|
Filing Status |
Maximum Deduction |
Phase-Out Begins (MAGI) |
Completely Phased-Out (MAGI) |
|
Single, Head of Household, Surviving Spouse |
$12,500 |
$150,000 |
$275,000 |
|
Married Filing Jointly |
$25,000 |
$300,000 |
$550,000 |
When calculating the overtime deduction, MAGI is equal to the adjusted gross income reported on your Form 1040, plus any deduction or exemption claimed for:
- foreign earned income
- foreign housing costs
- income for residents of Guam, American Samoa, the Northern Mariana Islands, or Puerto Rico
Also note that the $25,000 limit for joint filers applies to the combined total of you and your spouse’s qualified overtime compensation – it’s not a per spouse limit. So, for example, if you have $20,000 and your spouse has $15,000 of overtime pay for the year, your joint deduction is capped at $25,000, even though neither one of you received more than $25,000 in overtime pay.
Here’s an example of how to calculate the overtime deduction: Suppose you’re married and both you and your spouse receive $15,000 of qualified overtime pay in 2025 (for a combined total of $30,000). You also file a joint return, have a MAGI of $340,500, and satisfy all the overtime deduction requirements for the 2025 tax year.
First, since your combined total of $30,000 in qualified overtime pay is greater than the $25,000 limit, your maximum deduction is reduced from $30,000 to $25,000.
You then need to calculate an additional reduction, since your MAGI is $40,500 over the limit for joint filers ($340,500 - $300,000 = $40,500). To do this, first divide $40,500 by $1,000, and round down to the nearest whole number if you end up with a fraction. The result of this is 40 (after rounding down from 40.5). Next, multiply that amount by $100 to determine the additional reduction, which is $4,000 ($100 x 40 = $4,000).
That means your overtime deduction for 2025 is $21,000 ($25,000 - $4,000 = $21,000).
How do I claim the overtime deduction on my tax return?
The IRS created a new form – Schedule 1-A – to calculate and claim the overtime deduction (and other new deductions created by the One Big Beautiful Bill) on your federal income tax return. The combined total of all the deductions claimed on Schedule 1-A (including the overtime deduction) are reported on Form 1040.
You must send Schedule 1-A to the IRS with the rest of your return.
Note that all the deductions claimed on Schedule 1-A are “below-the-line” deductions. That means they’re reported on Form 1040 below the line for adjusted gross income (AGI). Below-the-line deductions don’t affect your AGI, since they’re taken into account after AGI is calculated. However, they will lower your taxable income, which reduces your overall tax bill.
A copy of Schedule 1-A can be found on the IRS website.
What taxes still apply even with “No Tax on Overtime”?
The “No Tax on Overtime” label is a bit misleading, since overtime pay is still subject to certain payroll taxes and perhaps state taxes. “You and your employer will still have to pay Social Security and Medicare taxes on the full amount,” says Adams. In addition, “states will have their own rules on how overtime is treated.”
If you’re an employee, your employer will withhold your share of Social Security and Medicare taxes (FICA taxes) on overtime pay from your paycheck and send it to the IRS (they will also pay the employer’s portion of these taxes). For 2025, Social Security taxes are only due on the first $176,100 of wages or other compensation (there’s no such limit for Medicare taxes).
|
Social Security Tax |
Medicare Tax |
Additional Medicare Tax |
|
|
Employee’s Tax Rate |
6.2% |
1.45% |
0.9% |
|
Employer’s Tax Rate |
6.2% |
1.45% |
0% |
|
Total Tax Rate |
12.4% |
2.9% |
0.9% |
|
Employee’s Compensation (including overtime) Subject to Tax – 2025 Tax Year |
First $176,100 ($184,500 for 2026) |
All Compensation |
Over $250,000 for married taxpayers filing a joint return
|
If you’re self-employed, any overtime compensation you receive from a job is included in gross income on Schedule C. As a result, it’s also used to calculate your self-employment tax, which is equal to both the employer’s and employee’s portion of Social Security and Medicare taxes. The self-employment tax is added to your federal income tax on Form 1040, but an income tax deduction is allowed for 50% of your self-employment tax.
With regard to federal income taxes, you may still owe taxes on your overtime pay if your MAGI is more than $150,000 ($300,000 for joint filers). That’s because your overtime deduction will be reduced – potentially to $0 – which will result in at least some of your overtime pay being taxed. You will also owe federal income tax on any overtime pay if you don’t qualify for the deduction – for instance, if you don’t have a Social Security number. Finally, unless you live in a state with no income tax, you might have to pay state income taxes on your overtime pay – and, perhaps, local taxes, too. If your state doesn’t have a tax deduction or other tax break for overtime compensation, you’ll likely owe state tax on that income. Even though some states will automatically adopt the federal overtime deduction because their tax laws are tied to federal law, they could “decouple” from the federal law down the road. So, make sure you check your state’s tax agency to see how overtime pay is treated where you live.
How does the new overtime deduction impact employers?
For the 2025 tax year, the overtime deduction doesn’t impact employers very much. According to the IRS, employers should generally continue using existing procedures for reporting and withholding federal income tax from overtime pay. This is designed to “avoid disruptions during the tax filing season and to give the IRS, business and tax professionals enough time to implement the changes effectively.”
But employers should plan for changes starting with the 2026 tax year. Perhaps the most notable difference will be how employers report overtime pay on Forms W-2, 1099-NEC, 1099-MISC, and 1099-K. Starting with forms completed for the 2026 tax year, employers will have to separately report overtime pay on those forms, rather than just include it with other compensation or payments.
If you’re an employer, here are a few things you can do now to prepare for the upcoming changes:
- Make sure your payroll systems can capture all qualified overtime pay, separate it from other forms of compensation, and accommodate new reporting requirements for W-2 and relevant 1099 forms.
- Review FLSA requirements regarding overtime pay to ensure compliance with federal law.
- Verify each employee’s FLSA coverage and exemption status.
- Encourage employees who receive overtime pay to fill out a new W-4 form in 2026 so that their income tax withholding is accurate.
- Check time-tracking systems and train affected workers on proper timekeeping procedures to make sure overtime hours are accurately reported.
- Learn more about the overtime deduction, since your workers will likely come to you with questions (but avoid giving personalized “tax advice”).
- Watch for new guidance from the IRS (we’ll help with that).
Frequently Asked Questions About the Overtime Deduction.
Q1: Is overtime pay taxable?
You must report overtime pay earned during the year as income on your federal tax return. However, you may be able to claim a tax deduction for that income. If you’re not eligible for the deduction, or any of your overtime pay doesn’t qualify for the deduction, you will owe federal income tax on at least a portion of your overtime pay. In addition, employees must pay FICA taxes on overtime compensation, while independent contractors owe self-employment taxes on any overtime pay they receive. Learn more about FICA taxes and self-employment taxes.
Q2: How does the overtime deduction work?
The overtime deduction allows eligible workers to subtract up to $12,500 of overtime pay from their federal taxable income (up to $25,000 for married couples filing a joint return). However, the deduction is gradually reduced once your modified adjusted gross income (MAGI) hits a certain amount. If your MAGI is too high, the deduction is completely eliminated. Check out the differences between adjusted gross income (AGI) and MAGI.
Q3: Does “no tax on overtime” apply to overtime pay earned in 2025?
Yes. The overtime deduction applies to overtime earned starting January 1, 2025. However, since the deduction wasn’t passed into law until July 2025, your employer isn’t required to report overtime separately on the Form W-2, 1099-NEC, 1099-MISC, or 1099-K you receive for the 2025 tax year. To accurately calculate your total overtime for the year, you may need to rely on paystubs or other records. See what other tax changes were made by the “One Big Beautiful Bill.”
Q4: How much of my overtime pay can be deducted?
The overtime deduction is only available for the “half” portion of the “time-and-a-half” pay that must be paid under federal law to certain workers who work overtime. In other words, you can’t deduct the regular pay you receive for working overtime, just the extra amount. For example, if you're normally paid $30 per hour, but you receive $45 per hour for overtime hours, you can only deduct the additional $15 you receive for overtime worked ($45 - $30 = $15). The Department of Labor offers more information about the federal overtime requirements.
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