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How Does No Tax on Overtime Work?
A plain-English guide to the new overtime deduction: who qualifies, how much you can deduct, and how to claim it.
June 14, 2026
A plain-English guide to the new overtime deduction: who qualifies, how much you can deduct, and how to claim it.
June 14, 2026
Beginning in 2025, eligible workers can deduct overtime pay on their federal tax returns for up to $12,500 for single filers and $25,000 for joint filers. If you earn overtime pay, this rule change could put money back in your pocket and even land you a bigger refund; since the overtime deduction was introduced, the average refund amount increased 11.1% from the previous year.
But to take advantage of no tax on overtime and keep more of the money you earn, you need to make sure you’re an eligible worker, your pay qualifies for the deduction, and you’re filing your tax return correctly.
We cover this because the rules around the new deduction are easy to misread, and one wrong assumption can cost you real money. Our tax expert flags a trap most people miss: overtime paid only because of state law, or extra pay an employer hands out voluntarily, doesn't count. More on that further down.
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With the One, Big, Beautiful Bill (OBBBA) Act that passed in 2025, eligible workers can deduct qualified overtime compensation from their federal tax returns, up to a maximum limit. This eliminates federal income tax liability for a portion of your overtime earnings. The deduction is only for federal income tax; you still have to pay Social Security, Medicare, and state and local taxes. The deduction is currently active for tax years 2025 through 2028.
Tax Provision / Rule | Single Filers | Married Filing Jointly | Ineligible / Excluded |
Maximum Deduction Cap | Up to $12,500 | Up to $25,000 | Married Filing Separately ($0) |
Phase-Out Threshold (MAGI) | Starts at $150,000 | Starts at $300,000 | Shrunk by $100 per $1,000 over limit |
Complete Phase-Out (MAGI) | $275,000 and above | $550,000 and above | Fully ineligible for deduction |
Eligible Tax Years | 2025 through 2028 | 2025 through 2028 | Tax years prior to 2025 / after 2028 |
Applicable Taxes | Federal Income Tax only | Federal Income Tax only | State, Local, Social Security, and Medicare taxes |
Qualifying Worker Status | FLSA Non-Exempt (w/ valid SSN) | FLSA Non-Exempt (w/ valid SSN) | FLSA Exempt, Gig Workers, Contractors |
Qualifying Pay Type | The "half" of time-and-a-half | The "half" of time-and-a-half | Base rate portion, voluntary overtime, state-only overtime |
Required Tax Forms | W-2 (Box 14), Schedule 1-A, Form 1040 (Line 13b) | W-2 (Box 14), Schedule 1-A, Form 1040 (Line 13b) | N/A |
Qualified overtime pay is no longer subject to federal income tax, up to a limit: the maximum amount you can deduct is $12,500 for single filers, and $25,000 for joint filers. The deduction is available whether you itemize deductions or you claim the standard deduction on your tax return.
The portion of your overtime pay that is still subject to federal income tax gets taxed at your regular tax rate.
“The maximum deduction is $12,500 for single, $25,000 for married filing jointly. This is unusual because it is a "marriage bonus" in that if married, more overtime qualifies for a deduction. If both spouses have qualified overtime pay, the maximum deduction for them together is $25,000,” says Annette Nellen, CPA and professor at San Jose State University.
Only eligible workers who earn a certain type of income can benefit from no tax on overtime.
You must meet the Fair Labor Standards Act (FLSA) guidelines to qualify for no tax on overtime:
Non-exempt employees: Only non-exempt employees, as defined by the FLSA, are eligible for the overtime deduction. Typically, these workers earn an hourly wage (or a salary below the minimum threshold defined by the Department of Labor), and employers are required to pay them 1.5x their regular pay rate for hours exceeding a 40-hour work week.
Income qualifications: The deduction only works for qualified overtime pay as defined by the FLSA. You can only deduct the “half” portion of your time-and-a-half earnings; your regular pay rate is still subject to federal income tax.
Income limits: The deduction begins to phase out for taxpayers with a modified adjusted gross income (MAGI) above $150,000 (or $300,000 for joint filers); for every $1,000 above this limit, your maximum deduction shrinks by $100. Workers earning at $275,000 and above (or $550,000 for joint filers) cannot claim the deduction at all.
Filing status: You can only claim the deduction if you are a single filer or joint filer.
Social Security Number: You must have a valid Social Security Number (SSN).
The IRS “allows a deduction for the overtime pay above the regular rate if paid under the Fair Labor Standards Act (FLSA), which generally applies when certain employees work over 40 hours in a week,” says Nellen.
Not everyone can claim no tax on overtime, and not all types of income qualify:
Exempt employees: Workers who are considered exempt under the FLSA do not qualify for the overtime deduction. These are generally salaried employees that do not get paid on an hourly basis (although salaried workers earning less than $35,568 annually still qualify for overtime).
Gig workers and independent contractors: Contract workers are not entitled to receive overtime pay by law, and so are unable to claim the deduction.
Payroll taxes: Your overtime pay is not exempt from payroll taxes, including Social Security and Medicare.
State and local taxes: You still have to pay state and local taxes on overtime pay according to the guidelines where you live.
Other types of pay: Any compensation you receive that is not FLSA-mandated overtime is ineligible for the deduction.
Filing status: You cannot claim the deduction if you are married but file your tax returns separately from your spouse.
If the overtime is only paid due to state law, [there is] no deduction for the employee. If an employer voluntarily pays extra pay, such as for working on Sunday, it doesn't qualify.
When you file your taxes, here’s how to claim your overtime deduction:
Review the guidelines to make sure you qualify for the deduction. Verify that you are a non-exempt employee, that you earn qualifying overtime pay, and that your MAGI is within the limits allowed to claim the deduction.
To claim the overtime deduction, you need to figure out how much overtime pay you received. Your employer should report this information in Box 14 of your Form W-2 that you receive in January. You can also use other records, like earning statements or pay stubs, to determine the amount of qualified overtime compensation you received.
Complete parts I and III of form Schedule 1-A, Additional Deductions (Form 1040) when you prepare your tax return. These sections list your MAGI (Line 3) and the total amount of qualified overtime compensation (Line 21). Then, add this number to any other deductions you can claim on Schedule 1-A to complete Line 38, your total additional deductions.
Take your total additional deductions and enter that number on Line 13(b) of Form 1040. Complete the rest of your tax return and make sure you attach the Schedule 1-A form when you file.
The best way to maximize your overtime tax deduction is to earn as much overtime as you [possibly can to claim the full deduction amount. Make sure to keep your own records of hours worked and overtime pay received to ensure your W-2 is completed accurately. If you’re married but you typically file separately from your spouse, consider changing your filing status if it makes financial sense – “married filing separately” is not eligible to receive the deduction.
Your next move depends on where you are right now.
When it's tax season and you're ready to file: pull out your Form W-2 and find your qualified overtime in Box 14. Run the numbers, complete Schedule 1-A, and carry the total to Line 13(b) of your 1040. Learn more here: How to Pay Your Taxes
If you're planning ahead for next year: keep your own log of overtime hours so you can check it against Box 14 when your W-2 lands. A small reporting gap can quietly shrink your deduction. For more on tax planning, read our guide, Tax Planning Strategies.
If you file separately from your spouse: run the math on switching to "married filing jointly." Separate filers can't claim this deduction at all, so the change could be worth real money. Read about filing jointly or separately.
“No Tax on Overtime” is actually a tax deduction that allows you to eliminate federal income tax for the portion of overtime pay that exceeds your regular pay rate. You still have to pay Social Security, Medicare, and state and local taxes on your earnings. Although the government could extend it, the deduction is currently set to expire after 2028.
If you are a non-exempt employee who receives qualified overtime pay, you may be able to claim the deduction. Make sure to check your eligibility, verify the amount of overtime pay you received, and complete your tax returns accurately to get a bigger break on your tax bill.
BestMoney exists to make financial decisions less overwhelming. We research tax policies and laws, tax relief companies, run the numbers, and tell you what we actually think.
In-depth Research: Our editorial team compares the fine data points—including deduction caps, phase-out thresholds, and hidden IRS eligibility triggers. We use our research and expert insights to break down the mathematical value directly to the consumer.
Expert Oversight: This guide was authored by Brian Acton, a seasoned financial analyst and consumer advocate who specializes in translating complex federal legislation and tax code into plain English.
Current Data: Tax guidelines in 2026 are evolving rapidly under new legislation like the OBBBA Act. We verify IRS updates, transition relief provisions, and phase-out brackets regularly to ensure the math you see today matches current tax law.
Verification: We interview third-party consumer advocates, CPAs, and tax professionals—like those quoted in this article—to provide a balanced, transparent view of the financial rewards and potential regulatory traps.
You can deduct the portion of your overtime pay that exceeds your regular pay rate, for up to $12,500 for single filers and $25,000 for joint filers.
You have to pay more taxes if you work overtime because you pay more toward Social Security, Medicare, and state and local taxes. In addition, you have to pay federal income taxes on the portion of your overtime pay that is your regular pay rate.
It is possible that you will get a bigger tax refund if you work overtime because you may have an additional deduction to claim. The size of your refund depends on factors including your base rate of pay, your income, how much you paid in taxes throughout the year, and more.
Brian Acton is a seasoned personal finance journalist at BestMoney.com who specializes in loans and debt consolidation. His work has appeared in The Wall Street Journal, TIME, USA Today, MarketWatch, Inc. Magazine, HuffPost, and other notable outlets.
