No Tax on Overtime: Complete Guide
Everything you need to know about the 2025 OBBB overtime tax deduction
We wrote this guide for FLSA-nonexempt workers, hourly or salaried, from the One Big Beautiful Bill Act's text. Understanding the 'premium portion' concept is critical—you can deduct the extra 50% overtime premium, not the full 150% overtime rate.
Max Deduction (single)
Max Deduction (joint)
Phase-out Start (single / joint)
The Extra Half of Time-and-a-Half
Can I deduct overtime pay from my taxes in 2025?
Yes, under the OBBB Act (2025-2028), FLSA-nonexempt workers can deduct the 'premium portion' of overtime pay — the extra 0.5x above the regular rate. Nonexempt status follows the FLSA salary and duties tests rather than hourly pay. The maximum deduction is $12,500 for single filers or $25,000 for married filing jointly.
- •Only the 0.5x premium is deductible, not full 1.5x rate
- •Must be an FLSA-nonexempt employee (a salary-and-duties test, not simply hourly pay)
- •Max: $12,500 single / $25,000 married
- •Phase-out starts at $150K (single) / $300K (married) of modified AGI
Updated September 2026 — Notice 2025-69 and IRS FS-2026-13
For tax year 2025, employers were not required to report qualified overtime compensation separately on Forms W-2, 1099-NEC, or 1099-MISC. Notice 2025-62 waived the information-reporting penalties, and Notice 2025-69 tells employees how to figure the amount. In August 2026 the IRS replaced its January overtime FAQs (FS-2026-01) with Fact Sheet FS-2026-13, which covers 2026 and later.
What this means for you: for 2025, you can generally rely on the qualified overtime your employer reported in W-2 Box 14 or on a separate statement (Notice 2025-69; 2025 Form 1040 instructions for Schedule 1-A). If there isn't one, figure it from your pay stubs, and deduct only the premium portion (the 0.5× above your regular rate), not the full overtime paycheck. From 2026 on, you can count only the qualified overtime your W-2 reports in Box 12 code TT; if it is understated, ask your employer for a corrected Form W-2c. Read FS-2026-13 on IRS.gov.
The OBBB overtime deduction was the most-misreported tax law of 2025 — most coverage said 'no tax on overtime,' which is wrong. Only the FLSA-required half-time premium is deductible, not the full overtime rate. The deduction phases out above $150K single / $300K MFJ of modified AGI and only applies to FLSA-nonexempt employees (hourly or salaried).
Real-world scenario
Warehouse worker, $28/hr base, 380 OT hours in 2026
Time-and-a-half on $28 = $42/hr. Deductible portion = $14/hr premium (NOT the full $42). 380 OT hours × $14 = $5,320 deductible. At a 22% marginal rate: $1,170 federal saved. Still pays full FICA on the entire $42/hr overtime wage. The deduction is income tax only.
The part most people miss
Salaried 'exempt' employees don't qualify even if they routinely work 55-hour weeks. The OBBB deduction is tied to FLSA-required overtime, which only applies to FLSA-nonexempt employees, hourly or salaried (or certain misclassified employees who successfully reclassify). If your W-2 box 1 doesn't break out the overtime premium separately, ask payroll — they need to track it explicitly for 2025+ filings.
What Changed in 2025One Big Beautiful Bill Act
| Feature | Before OBBB (2024) | After OBBB (2025) | |
|---|---|---|---|
| Overtime Tax Deduction | No deduction existed | Up to $12,500/$25,000 | |
| What's Deductible | All OT fully taxed | Premium portion (0.5x rate) | |
| Eligibility | N/A | FLSA non-exempt employees | |
| Phase-Out (Single) | N/A | Starts at $150,000 of modified AGI |
Key Facts at a Glance
Max Deduction (Single)
$12,500
Max Deduction (Married)
$25,000
Phase-Out Starts (Single, modified AGI)
$150,000
Effective Years
2025-2028
What is the Overtime Tax Deduction?
The "No Tax on Overtime" provision is part of the One Big Beautiful Bill Act (Public Law 119-21), signed into law on July 4, 2025. It creates a new below-the-line deduction for non-exempt employees who receive overtime pay required under the Fair Labor Standards Act (FLSA) Section 7.
This deduction specifically applies to the premium portion of overtime pay—the extra 50% paid above your regular hourly rate—not the full overtime payment.
Understanding the "Premium Portion"
This is the most important concept to understand. Under FLSA, employers must pay 1.5× your regular rate for overtime (time-and-a-half). The deductible amount is only the extra 0.5×—not the full 1.5×.
Example Calculation
If you work 10 overtime hours per week for 50 weeks, your deductible premium is: $10 × 10 hours × 50 weeks = $5,000 deduction
Who Qualifies for the Overtime Deduction?
Two filing conditions apply on top of the FLSA test: the person who earned the overtime needs a Social Security number valid for employment, and if you're married you must file a joint return — married filing separately can't claim the deduction (Schedule 1-A).
Eligible (Non-Exempt)
- Hourly workers paid for overtime
- Salaried nonexempt employees (overtime on a regular rate figured from the salary)
- Employees receiving FLSA Section 7 overtime
- Blue-collar workers (most qualify)
- Retail and food service workers
- Healthcare aides and technicians
Usually not eligible (exempt), only if the FLSA salary AND duties tests are met
- Executives and managers paid a salary of at least $684/week whose primary duty is management and who direct 2+ employees
- Administrative employees (salary ≥ $684/week; primary duty office work tied to business operations, with independent judgment)
- Learned and creative professionals (salary ≥ $684/week; primary duty needs advanced knowledge or creative talent; licensed doctors, lawyers and teachers have no salary test)
- Computer professionals whose primary duty is systems analysis, programming or software/hardware design (salary ≥ $684/week or ≥ $27.63/hour); help-desk and repair roles are usually nonexempt
- Outside sales employees whose primary duty is making sales away from the employer's place of business
Job titles alone don't decide it; ask payroll.
Not Sure If You're Exempt?
Check your pay stubs for overtime pay at 1.5× your rate. If you're paid overtime this way, you're likely non-exempt and may qualify. Your employer should be able to confirm your classification.
Income Phase-Out Explained
If your modified adjusted gross income (MAGI: AGI plus any excluded foreign-earned, Puerto Rico or American Samoa income; for most filers the same as AGI) exceeds certain thresholds, your deduction is reduced:
Single Filers
Max deduction: $12,500
Phase-out begins above $150,000 MAGI
Deduction reduced $100 per full $1,000 of MAGI over threshold
Married Filing Jointly
Max deduction: $25,000
Phase-out begins above $300,000 MAGI
Deduction reduced $100 per full $1,000 of MAGI over threshold
Worked Examples
Example 1 — Hourly, non-exempt, single
Base rate $25/hr, 200 hours of FLSA overtime at $37.50/hr. Premium portion is the ½-time component: $12.50 × 200 = $2,500. The full $2,500 is deductible (well under the $12,500 cap and below the MAGI phase-out).
Example 2 — Salary non-exempt, MFJ
Salaried-non-exempt employee with computed regular rate $30/hr; 400 OT hours. Premium portion = $15 × 400 = $6,000. Combined with spouse $8,000 of qualifying OT premium → $14,000 claimed against the $25,000 MFJ cap. Fully deductible.
Example 3 — Hourly, single, $170,000 MAGI
$20,000 of MAGI over the $150,000 single phase-out: 20 full $1,000 steps × $100 = $2,000. A $12,500 premium portion becomes a $10,500 deduction (a $5,000 premium portion becomes $3,000).
Only FLSA-defined overtime qualifies. State-mandated overtime above federal FLSA requirements (e.g., California daily overtime) does NOT qualify for the OBBB deduction. Only the premium portion (the half-time over the regular rate) is deductible — not the full overtime wages.
Calculate Your Overtime Deduction
Use our free calculator to see exactly how much you can save with the overtime tax deduction.
Frequently Asked Questions
Official IRS Sources
Related OBBB Calculators2025
Related OBBB Guides2025
Does your state actually tax your overtime?
Colorado, for example, requires an add-back of the federal overtime deduction on the state return. Check every state's position on tips and overtime.
State Tips & Overtime Conformity Tracker →Sources & References
Primary references used for this content
One Big Beautiful Bill Act
Statutory text for the 2025-2028 deductions
View on congress.gov
2026 Inflation Adjustments
Official 2026 brackets, deductions, and thresholds
View on irs.gov
Taxable income defined
Standard deduction and the below-the-line deduction list
View on law.cornell.edu
✓3 primary sources; links re-checked on a weekly rotation by the source watcher