When Does No Tax on Overtime Start? OBBBA 2025–2028 Guide
Last Updated: 2026-07-21
The federal No Tax on Overtime deduction created by OBBBA (Public Law 119-21, signed July 4, 2025) starts with tax year 2025. Overtime earned from January 1, 2025 onward qualifies; you claim it on Schedule 1-A when you file your 2025 return in early 2026. The deduction runs through December 31, 2028, then expires unless Congress extends it.
- Effective tax years: 2025 · 2026 · 2027 · 2028
- First filing season to claim: 2026 (for your 2025 return)
- Deduction cap: $12,500 single / $25,000 joint
- MAGI phase-out begins: $150,000 single / $300,000 joint
- Sunset: December 31, 2028 — no automatic renewal
What "No Tax on Overtime" Actually Means
The popular phrase oversimplifies what OBBBA actually did. The deduction is narrower than the headline suggests — and that's the most important thing to understand before you plan around it.
Only the FLSA premium portion is deductible
Overtime in the United States is paid at "time and a half" — 1.5× your regular rate. OBBBA only deducts the "half" (the 0.5× premium employers pay on top of the base rate). The 1× straight-time portion is still taxable like any other wage.
It's a federal income tax deduction, not a payroll tax exemption
Social Security (6.2%) and Medicare (1.45%) — together FICA — still apply to your full overtime pay, premium portion included. OBBBA only reduces federal income tax, claimed when you file your annual return.
It's claimed on your tax return, not in your paycheck
Your employer doesn't reduce withholding automatically. The deduction kicks in when you file Schedule 1-A and Form 1040 — meaning the benefit shows up as a smaller tax bill or larger refund, not in your weekly check.
It's federal-only — your state may still tax the full amount
State conformity is separate from the federal deduction. California FTB reports nonconformity to IRC §225; Wisconsin AB 461 is veto-sustained. If your state does not adopt a matching subtraction, you'll still owe state income tax on overtime even if your federal tax drops.
The OBBBA Timeline (2025–2028)
Six dates worth knowing. The deduction is retroactive to January 1, 2025, even though the law was signed mid-year — so any qualifying overtime you earned in 2025 counts.
- 2025-07-04
OBBBA signed into law
Public Law 119-21 enacted, adding IRC §225. The deduction applies retroactively to qualifying overtime earned from January 1, 2025.
- 2025-11
IRS Notice 2025-69 published
Transition relief for tax year 2025 W-2 reporting. Employers may use box 14 with any label, or omit the OT line entirely. Pay stubs become the fallback documentation.
- 2026-01 to 2026-04
First filing season
Tax year 2025 returns filed using the new Schedule 1-A. This is when search demand for "how to claim no tax on overtime" peaks.
- 2026-01-01
W-2 box 12 code TT becomes mandatory
From tax year 2026 onward, employers must report qualified overtime compensation in box 12 with code TT. The transition relief expires.
- 2027-Q4 / 2028-Q1
Congressional extension window
If lawmakers want to extend the deduction past 2028, this is the realistic window for action. There's no automatic renewal — extension requires new legislation.
- 2028-12-31
Sunset
IRC §225 sunsets. Overtime earned in 2029 onward returns to fully taxable at the federal level unless Congress acts.
Are You Eligible? Decision Framework
Three quick questions decide it. If you answer yes to all three, you qualify (at least partially).
Are you classified as FLSA non-exempt?
Yes → Continue to Step 2
No → Salaried-exempt employees, independent contractors, and most outside-sales positions are not covered by FLSA's overtime rules — and OBBBA inherits that scope. You're not eligible.
Did you earn paid overtime hours (>40/week) in 2025 or later?
Yes → Continue to Step 3
No → OBBBA only deducts overtime that was actually earned and paid as such. If you have no qualifying OT this year, there's nothing to deduct yet.
Is your MAGI below $275,000 (single) or $550,000 (joint)?
Yes → You qualify, at least partially. Use the calculator to estimate your effective deduction.
No → Above the full phase-out point — $0 deduction this year.
Applicability cheat sheet
| Your situation | Eligible? | Detail |
|---|---|---|
| Hourly worker, FLSA non-exempt, MAGI under $150k single | Yes (full) | Standard beneficiary. |
| Hourly worker, MAGI $150k–$275k single | Yes (partial) | Phase-out reduces $100 per $1,000 of MAGI above $150k. |
| Hourly worker, MAGI above $275k single | No | Fully phased out. |
| Salaried exempt employee | No | FLSA does not require overtime pay; OBBBA does not reach exempt salaries. |
| Salaried non-exempt with paid OT | Yes | Verify your W-2 separately reports the OT premium. |
| Independent contractor (1099) | No | FLSA does not cover contractors. |
| Tipped worker | Partial | OT premium portion qualifies, but the regular rate calculation includes tip credit — check pay stubs carefully. |
| W-2 with no separate OT line (2025) | Maybe | Allowed under transition relief — compute the FLSA premium yourself from pay stubs. |
How Much Can You Save?
The federal tax savings depend on three numbers: your premium amount, your effective deduction (after caps and phase-out), and your marginal federal bracket. The calculator does this for you — these examples illustrate the range.
Average single worker · 22% bracket
$22/hr · 150 OT hrs · MAGI $60,000
$1,650 premium → $1,650 effective → $363 savings
Joint, entering phase-out · 22% bracket
$30/hr · 300 OT hrs · MAGI $310,000
$4,500 premium → $3,500 effective → $770 savings
High-income single, fully phased out · 32% bracket
$50/hr · 400 OT hrs · MAGI $280,000
$10,000 premium → $0 effective → $0 savings
Plug in your own numbers — the calculator handles caps, phase-out, and bracket interaction.
Estimate your deduction →How to Claim It on Your Taxes
OBBBA's deduction is claimed on Schedule 1-A, a new attachment to Form 1040 introduced for tax year 2025. The form itself applies the cap and phase-out automatically — your job is to enter the qualified OT amount.
Where to find qualified OT on your W-2
Tax year 2025
Optional (transition relief)
Under IRS Notice 2025-69, employers may use box 14 with any label, or omit the OT line entirely. If your 2025 W-2 doesn't list OT separately, that's compliant — use pay stubs to compute the FLSA premium yourself.
Tax year 2026 and later
W-2 box 12, code TT
Mandatory. Employers must report qualified overtime compensation in box 12 with code 'TT'. The amount in this box is what flows to Schedule 1-A.
Schedule 1-A Part III — four-step walkthrough
Open Schedule 1-A, Part III
Part III is the section dedicated to qualified overtime compensation under IRC §225.
Enter your qualified OT compensation
Line 14a = qualified OT from W-2 box 1 (matches box 12 code TT for 2026+). Line 14b = qualified OT from 1099-NEC box 1 or 1099-MISC box 3 (for non-employee contractor work that includes premium pay).
Let the form apply the cap and phase-out
The form caps the deduction at $12,500 (single) or $25,000 (joint), then reduces it by $100 for every $1,000 of MAGI above $150,000 (single) or $300,000 (joint). Fully phased out at $275,000 / $550,000.
Total flows to Form 1040 Line 13b
The final qualified-overtime deduction lands on Form 1040 Line 13b, where it reduces your taxable income.
Filing requirements
- If you're married, you must file jointly to claim the deduction. Married Filing Separately (MFS) is not eligible.
- Both spouses must have Social Security numbers valid for employment. ITINs alone do not qualify.
- The deduction is in addition to the standard deduction — you don't have to itemize to claim it.
Does Your State Honor the Deduction?
Federal deduction does not equal state deduction. The rows below are limited to conclusions checked against government primary sources on the Sources date.
State rows last checked:
| State | Status | Detail |
|---|---|---|
| California | Non-conform | FTB reports California does not conform to the IRC §225 overtime deduction — state income tax still applies to full overtime pay. |
| Indiana | Conform 2026 (single year) | Indiana DOR Information Bulletin #128 allows a state deduction for qualified overtime for tax year 2026 only. |
| Michigan | Conform 2026–2028 | Public Act 24 of 2025 (approved 2025-10-07) allows a state deduction for IRC §225 qualified overtime for tax years 2026 through 2028. |
| Wisconsin | Veto sustained | 2025 Assembly Bill 461 (overtime income-tax subtraction) has status Veto Sustained — no state overtime subtraction from that bill is in effect. |
States with no broad personal income tax (conformity not applicable)
Residents of these states already pay no state income tax on wages, so the OBBBA federal deduction is pure upside without a state-conformity question:
After 2028: The Cliff
IRC §225 contains a hard sunset clause: "No deduction shall be allowed under this section for any taxable year beginning after December 31, 2028." There is no automatic renewal mechanism — the next decision lies entirely with Congress.
Watch the 2027-Q4 / 2028-Q1 legislative window
If extension or replacement legislation is going to happen, this is the realistic window. Track House Ways and Means Committee and Senate Finance Committee activity.
Plan for the cliff in your 2028 budgeting
If you've been counting on the deduction in your tax planning, treat 2028 as the last guaranteed year. OT earned in 2029 onward could revert to fully taxable at the federal level.
Re-evaluate state strategies
States that conformed temporarily (like Indiana for 2026) may not extend either. State conformity windows can close before — or after — the federal sunset.
Common Misconceptions
Search demand around OBBBA is full of half-truths. Here are the biggest ones.
Myth: All my overtime pay is tax-free now.
Reality: Only the FLSA premium portion (the 0.5× half) is deductible. The straight-time portion is still taxed normally.
Myth: Social Security and Medicare are also waived on overtime.
Reality: FICA payroll taxes (Social Security 6.2% + Medicare 1.45%) still apply to your full overtime pay, premium and all. OBBBA only affects federal income tax.
Myth: My state will also exempt overtime from tax.
Reality: Not automatically. California FTB reports nonconformity; Wisconsin AB 461 is veto-sustained; Indiana is 2026-only; Michigan covers 2026–2028. Check your state's Department of Revenue for the current year.
Myth: I'm a salaried employee, so I qualify automatically.
Reality: Salaried-exempt employees aren't entitled to overtime under FLSA, so OBBBA doesn't reach them. Only FLSA non-exempt employees qualify, regardless of salary or hourly classification.
Myth: I'm an independent contractor (1099), so I qualify.
Reality: FLSA does not cover independent contractors. OBBBA inherits FLSA's coverage scope, so 1099 contractors don't qualify — even if they receive premium-rate work.
Myth: It's automatic — my employer handles the deduction.
Reality: You claim the deduction yourself on Schedule 1-A when you file. Employers report the OT amount on your W-2 (box 12 code TT from 2026 onward); the IRS doesn't apply the deduction without you filing it.
Myth: It will continue forever once it's law.
Reality: IRC §225 sunsets December 31, 2028. There's no automatic extension; Congress must pass new legislation to continue it past that date.
FLSA premium rules explained — which overtime the deduction actually covers →
Ready to estimate your deduction?
The No Tax on Overtime Calculator applies caps, MAGI phase-out, and bracket interaction in real time.
Frequently Asked Questions
Tax year 2025 is the first year covered. You claim the deduction when filing your 2025 return in early 2026. Overtime earned from January 1, 2025 onward qualifies, even though OBBBA wasn't signed until July 4, 2025.
Yes. The deduction has been law since July 4, 2025 (OBBBA signing date) and applies retroactively to all 2025 overtime. The first filing season to claim it is early 2026 for tax year 2025 returns.
It doesn't reduce withholding automatically. The deduction applies to your annual tax return, not your weekly paycheck. Some employers may voluntarily adjust W-4 withholding for affected workers, but most won't — expect the benefit as a smaller tax bill or larger refund at filing time.
Yes. All qualifying overtime earned from January 1, 2025 onward is eligible, even though the law wasn't signed until July 4, 2025. The retroactive application is built into IRC §225.
No. Only the FLSA premium portion — the 0.5× half-time amount on top of your regular rate — is deductible. The straight-time portion (the 1× base) remains taxed normally.
No. FICA taxes (Social Security 6.2% + Medicare 1.45%) still apply to your full overtime pay. OBBBA only affects federal income tax.
FLSA non-exempt salaried employees who earn paid overtime can claim it. FLSA exempt salaried employees cannot — they're not entitled to overtime pay under FLSA in the first place, so OBBBA doesn't reach them.
Independent contractors aren't covered by FLSA, so the OBBBA overtime deduction doesn't apply to 1099 income — even if you receive premium-rate work.
It depends on your state's statute. As checked on 2026-07-21 against government sources: California FTB reports nonconformity to IRC §225; Indiana DOR allows a 2026-only state deduction; Michigan PA 24 of 2025 covers tax years 2026–2028; Wisconsin AB 461 is veto-sustained. For other states (including NY and GA), confirm with your Department of Revenue. Eight states have no broad income tax (AK, FL, NV, NH, SD, TN, TX, WA), so conformity does not apply.
Use this site's No Tax on Overtime Calculator to compute your premium and effective deduction, then transcribe the qualified overtime amount onto Schedule 1-A Part III (Line 14a from W-2, Line 14b from 1099). The form caps and phases out automatically; the total flows to Form 1040 Line 13b.
For tax year 2025, that's allowed under IRS Notice 2025-69 transition relief — employers may use box 14 with any label or omit the OT line entirely. Use pay stubs to compute the FLSA premium yourself: hourly_rate × 0.5 × annual_OT_hours. From 2026 onward, employers must report qualified OT in box 12 with code TT.
There's no automatic renewal. IRC §225 sunsets December 31, 2028 unless Congress passes new legislation. Watch for legislative activity in 2027-Q4 / 2028-Q1; without an extension, OT earned in 2029 onward returns to fully taxable at the federal level.