2026 OnE Big Beautiful Bill Updates
You Worked the Extra Hours. Now Keep the Extra Money.
New for tax year 2025: Deduct the overtime premium you earned. That “time-and-a-half” just got even better. Let’s make sure you get what’s yours.
"No Tax on Overtime"
Tax Deduction Guide for Overtime Workers
Overview of the Deduction
Effective 2025 through 2028, individuals may deduct the portion of qualified overtime pay that exceeds their regular rate of pay.
This means the "half" portion of "time-and-a-half" qualifies for the deduction.
Overtime must be reported on Form W-2, Form 1099, another statement furnished to the individual, or directly by the individual.
What is Qualified Overtime?
Example: How It Works
If your regular rate is $20/hour and you earn $30/hour for overtime (time-and-a-half):
✓ Regular portion: $20 (taxable as usual)
✓ Overtime premium: $10 (this is the "half" that qualifies for the deduction)
Who Qualifies
SSN Required
Taxpayers must have a valid Social Security Number to claim this deduction.
All Filers
Available to both itemizing and non-itemizing taxpayers.
Proper Reporting
Overtime must be reported on W-2, 1099, another statement, or directly by the individual.
Income Phase-Out Limits
Deduction phases out for taxpayers with modified adjusted gross income over:
How to Claim the Deduction
- Include your Social Security Number on the return
- File jointly if you're married
- Ensure overtime compensation is properly reported
Reporting Requirements
Employers and other payors must report qualified overtime compensation on IRS (or SSA) information returns.
Note: Treasury and the IRS will provide transition relief for tax year 2025.
No Tax on Overtime
Get answers to the most common questions about the new overtime deduction
How does the No Tax on Overtime deduction work in 2025?
For tax years 2025 through 2028, individuals who receive qualified overtime compensation may deduct the pay that exceeds their regular rate of pay. This is generally the "half" portion of "time-and-a-half" compensation that is required by the Fair Labor Standards Act. For example, if you earn $20/hour regular pay and $30/hour for overtime, the $10 premium qualifies for the deduction.
Is overtime taxed at 40%?
No. Overtime isn't taxed at a higher rate than your regular pay. However, your paycheck withholding might make it look that way. When you earn more in a single pay period, your employer withholds more taxes—which can make it seem like overtime gets hit harder. The overtime tax deduction allows you to deduct up to $12,500 ($25,000 for joint filers) of the overtime premium.
Who is eligible for the No Tax on Overtime deduction?
Workers who receive overtime compensation required under the Fair Labor Standards Act (FLSA) and have it properly reported on Form W-2, Form 1099, or another statement. You must have a valid Social Security Number, and the deduction phases out if your modified adjusted gross income exceeds $150,000 ($300,000 for joint filers).
What is the maximum overtime deduction I can claim?
The maximum annual deduction is $12,500 for single filers and $25,000 for married couples filing jointly. This applies to the premium portion of overtime pay only—the "half" in "time-and-a-half." Your regular hourly rate during overtime hours is still taxed normally.
Will I get my overtime tax back when I file?
The new overtime tax deduction allows employees to take a federal tax deduction of up to $12,500—or $25,000 if filing jointly—for the premium part of overtime pay. This deduction is taken when you file your tax return, not through payroll. If you qualify, you may see a larger refund or owe less taxes.
Is overtime no longer taxable?
Overtime is still subject to Social Security and Medicare taxes, and potentially state income taxes. The new law creates a federal income tax deduction for the premium portion of overtime pay. This means while overtime is still taxed, eligible workers can deduct up to $12,500 ($25,000 joint) of that overtime premium when filing their federal return.
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