Tax on Overtime Pay: 2025–2028 Overtime Deduction Guide
Last Updated: 2026-11-04
Yes, overtime pay is still subject to standard federal income tax withholding and 7.65% FICA payroll taxes on your paycheck — but for tax years 2025 through 2028, the OBBBA (IRC §225, signed July 4, 2025) lets eligible FLSA non-exempt workers deduct the 0.5× FLSA overtime premium portion (up to $12,500 single / $25,000 married filing jointly) on Schedule 1-A. Overtime earned from January 1, 2025 through December 31, 2028 qualifies.
- 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
How Is Overtime Taxed in 2025–2028? (No Tax on Overtime Explained)
On your paycheck, tax on overtime pay works the same as regular wages — there is no special higher federal overtime tax rate, and standard income tax withholding plus 7.65% FICA payroll taxes still apply. However, for tax years 2025 through 2028, the OBBBA overtime deduction (IRC §225) lets you deduct the FLSA 0.5× premium portion when you file your federal tax return. Here is what "No Tax on Overtime" actually means in practice:
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.
When Does No Tax on Overtime Start? The 2025–2028 OBBBA Timeline
If you are asking when will no tax on overtime start, the deduction is already in effect and retroactive to January 1, 2025 — even though the OBBBA was signed mid-year on July 4, 2025. Any qualifying overtime you earned in 2025 through 2028 counts across these six key dates:
- 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.
No Tax on Overtime Rules: FLSA Qualified Overtime & Income Limits
Three core no tax on overtime rules determine your eligibility: your FLSA worker classification, whether your overtime meets the statutory definition of FLSA qualified overtime, and your Modified Adjusted Gross Income (MAGI) limit.
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.
FLSA Qualified Overtime Meaning: What Counts vs. What Doesn't
Under IRC §225(c), FLSA qualified overtime means only the overtime compensation required under Section 7 of the Fair Labor Standards Act (29 U.S.C. §207) that exceeds your regular rate of pay — specifically the 0.5× half-time premium on hours worked over 40 in a workweek. Contractual bonuses, daily overtime under 40 weekly hours, and workers governed by the Railway Labor Act (such as railroad employees exempt from FLSA §7 under 29 U.S.C. §213(b)(2)) do not generate FLSA qualified overtime unless Congress amends the statute.
| Overtime Pay Type | Deductible FLSA Portion | Details & Statutory Rule |
|---|---|---|
| Standard FLSA 1.5× Overtime (>40 hrs/wk) | 0.5× premium only (1/3 of total 1.5× OT pay) | Required by FLSA §7; the 1.0× base wage remains fully taxable. |
| Contractual or State 2.0× Double Time | 0.5× FLSA premium only (if >40 hrs/wk; $0 if ≤40 hrs/wk) | Only the 0.5× portion required by federal FLSA §7 over 40 weekly hours qualifies (1/4 of 2.0× pay). |
| Holiday, Weekend, or Shift Differential (≤40 hrs/wk) | $0 (not FLSA-mandated overtime) | Extra pay for holidays or weekends does not qualify unless those hours push your weekly total past 40. |
| Railway Labor Act (Railroad) & FLSA Exempt Workers | $0 (exempt from FLSA §7) | Railroad workers under FLSA §13(b)(2) and salaried-exempt staff are excluded from IRC §225. |
Applicability cheat sheet
| Worker / Pay Situation | Qualifies? | Details & Statutory Rule |
|---|---|---|
| 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 to Calculate Overtime for Taxes (2025–2028 Deduction Formula)
If you need to know how to calculate overtime for taxes — or how to calculate overtime pay for taxes when your 2025 W-2 does not list a separate box — follow this three-step 2025–2028 overtime tax deduction formula before entering your figure on Schedule 1-A:
Find Your FLSA Qualified Overtime Premium (from W-2 or Pay Stubs)
To calculate overtime on your W-2 for tax year 2025 (under IRS Notice 2025-69 transition relief), take your total 1.5× FLSA overtime pay and divide by 3 to isolate the 0.5× premium (or divide 2.0× FLSA double-time pay by 4). Starting in tax year 2026, employers report this exact figure in W-2 Box 12 with Code TT.
Apply the Annual Cap & MAGI Income Limit Phase-Out
The no tax on overtime income limit caps your deduction at $12,500 (single / head of household) or $25,000 (married filing jointly). Above $150,000 MAGI ($300,000 joint), your cap shrinks by $100 for every full $1,000 of excess MAGI until it reaches $0 at $275,000 ($550,000 joint).
Multiply by Your Marginal Tax Bracket (Deduction vs. Tax Credit)
Many filers search how to calculate the overtime tax credit, but IRC §225 is an above-the-line tax deduction (reducing taxable income), not a dollar-for-dollar tax credit. A $2,000 deduction in the 22% bracket saves $440 in federal income tax.
Worked Tax Savings Examples by Income Bracket
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 the Overtime Tax Deduction on W-2 & Schedule 1-A
OBBBA's overtime tax deduction is claimed on Schedule 1-A, an attachment to Form 1040 introduced for tax year 2025. The form itself applies the $12,500 / $25,000 cap and MAGI 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.
State Overtime Tax Rules: Does Your State Honor the Deduction?
A federal overtime deduction does not automatically mean a state overtime deduction. The rows below are limited to conclusions checked against government primary sources on the Sources date.
State rows last checked:
| State | Conformity Status | Details & Statutory Rule |
|---|---|---|
| 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 (Texas, Florida & 6 more)
If you are asking "does overtime get taxed in Texas or Florida?", residents of these eight states already owe $0 state income tax on wages and overtime — so you get the full OBBBA federal overtime deduction with no state tax conformity issue:
After 2028: The OBBBA Expiration 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 Overtime Tax Misconceptions (Deduction vs. Tax Credit)
Search demand around OBBBA overtime tax rules is full of half-truths — including confusion between an overtime tax deduction and an overtime tax credit. Here are the biggest myths.
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.
Ready to calculate your 2025–2028 overtime tax deduction?
Use the No Tax on Overtime Calculator to apply the $12,500 / $25,000 cap, MAGI phase-out, and marginal tax bracket in real time — or start with our standard Overtime Pay Calculator if you need to figure out your gross 1.5x pay first.
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. You can check your gross 1.5× pay vs. base pay using our Overtime Pay Calculator.
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 (use our California Overtime Calculator to estimate CA daily and double-time pay); 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 our 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.
Under IRC §225 and IRS Notice 2025-69, only the 0.5× FLSA overtime premium is deductible. Multiply your regular hourly rate by 0.5 and by your total FLSA overtime hours worked over 40 per week. If your 2025 pay stub only shows total 1.5× overtime pay, divide that lump sum by 3 (or divide 2.0× FLSA double-time pay by 4). Starting in tax year 2026, employers report this figure directly in Form W-2 Box 12 with Code TT. You can verify your exact figure with the No Tax on Overtime Calculator.
It is an above-the-line federal income tax deduction (claimed on Schedule 1-A and Form 1040 Line 13b), not a dollar-for-dollar tax credit. An overtime deduction lowers your taxable income by up to $12,500 ($25,000 married filing jointly), meaning your actual tax savings equal your deductible FLSA premium multiplied by your marginal federal tax bracket (10% to 37%).