No tax on overtime: the complete guide
The slogan is bigger than the law. Here's exactly what the 2025–2028 deduction covers, who can claim it, and the mistakes that will cost people money this filing season.
What the law actually does
The One Big Beautiful Bill Act created Internal Revenue Code §225: a temporary federal income-tax deduction for "qualified overtime compensation," for tax years 2025 through 2028. Three words matter most:
- Deduction, not exemption. Overtime is still paid, withheld on, and reported as income during the year. You claim the benefit when you file your return, on Schedule 1-A.
- Qualified. Only overtime the FLSA requires — hours over 40 in a workweek — counts.
- Compensation = the premium only. Only the extra "half" of time-and-a-half is deductible, not the whole overtime wage.
The numbers
| Rule | Single / Head of household | Married filing jointly |
|---|
| Maximum deduction | $12,500 | $25,000 |
| Phase-out starts (MAGI) | $150,000 | $300,000 |
| Phase-out rate | −$100 of deduction per $1,000 of MAGI above the threshold |
| Tax years | 2025, 2026, 2027, 2028 |
Estimate yours in seconds with the no tax on overtime calculator.
Who qualifies — and who doesn't
- Qualifies: FLSA non-exempt employees who worked FLSA overtime, with a valid Social Security number. You can claim it whether or not you itemize.
- Doesn't qualify: exempt employees (no FLSA overtime by definition); married filing separately; overtime owed only under state law, a contract, or company policy; standby/on-call pay and voluntary premiums.
- Double time: still only a 0.5× premium counts per hour.
How claiming works, year by year
- 2025 (filed in early 2026): employers were not required to report qualified overtime on the W-2. Workers compute it from pay records — IRS Notice 2025-69 lists acceptable methods. Keep your pay stubs.
- 2026–2028: employers must report qualified overtime separately on updated forms, so your figure arrives ready-made.
- Enter it on Schedule 1-A (Form 1040); the form applies your cap and phase-out.
The $13,500 trap: a worker with $13,500 of overtime pay at $30/hour has a $4,500 deduction, not $13,500 — because only the premium third of time-and-a-half pay counts. Filers who claim the full overtime amount will have the excess disallowed.
What the deduction does NOT do
- It doesn't stop withholding during the year — your paychecks look the same; the benefit arrives at filing.
- It doesn't touch Social Security and Medicare (FICA) taxes.
- It doesn't change state taxes — most states don't follow the federal deduction.
- It ends after 2028 unless Congress extends it.
Ready to run your numbers? Open the deduction calculator — it applies the premium rule, caps and phase-out automatically.