Direct Answer
No tax on overtime is a federal income tax deduction for W-2 employees enacted under IRC § 225 of the One Big Beautiful Bill Act. It applies to tax years 2025 through 2028. No taxes on overtime means the premium portion of your overtime pay is deductible from federal taxable income. The deductible amount is the wages earned above your regular rate for FLSA-required overtime. The cap is $12,500 per return for single and head of household filers, and $25,000 per joint return for married couples filing jointly. This is an income tax deduction only. Social Security, Medicare (FICA), and most state income taxes still apply to overtime wages in full. The deduction phases out starting at $150,000 MAGI for single filers ($300,000 for married filing jointly).
Key Takeaways
- Maximum deduction: $12,500 single/HOH per return; $25,000 for a joint return (MFJ) under IRC § 225
- What is deductible: the overtime premium only. For time-and-a-half pay, only the "half" above your regular rate qualifies.
- Employee-only: W-2 workers with FLSA-required overtime. Self-employed workers do not qualify.
- Available for TY 2025, 2026, 2027, and 2028 only. Expires after December 31, 2028.
- Above-the-line: claim it whether you take the standard deduction or itemize. Filed on Schedule 1-A.
- Phase-out begins at $150,000 MAGI (single/HOH) and $300,000 MAGI (MFJ).
- Deduction fully eliminated at approximately $275,000 MAGI (single/HOH) and $550,000 MAGI (MFJ).
- FICA (Social Security 6.2% + Medicare 1.45%) is NOT reduced by this deduction.
- Married Filing Separately filers do not qualify.
Quick Facts: Overtime Deduction (Tax Year 2025)
Quick Facts — Tax Year 2025 (OBBBA)
| Item | Value | Status |
|---|
| IRC section | §225 | Confirmed |
| Governing form | Schedule 1-A (Form 1040) | Confirmed |
| Maximum deduction — single/HOH | $12,500 | Confirmed |
| Maximum deduction — MFJ (combined) | $25,000 | Confirmed |
| Phase-out threshold — single/HOH | $150,000 MAGI | Confirmed |
| Phase-out threshold — MFJ | $300,000 MAGI | Confirmed |
| Phase-out rate | $100 reduction per $1,000 over threshold | Confirmed |
| Phase-out elimination — single/HOH | ~$275,000 MAGI | Confirmed |
| Phase-out elimination — MFJ | ~$550,000 MAGI | Confirmed |
| What qualifies | Overtime premium only — the 0.5x portion above the regular rate | Confirmed |
| Employee requirement | FLSA employees only — not available to self-employed | Confirmed |
| FICA treatment | Not reduced — income tax deduction only | Confirmed |
| MFS filing status | Not eligible | Confirmed |
| OBBBA sunset | December 31, 2028 (TY 2025–2028) | Confirmed |
| State conformity | Varies — no federal mandate | Provisional |
How the Overtime Deduction Is Calculated
Under the One Big Beautiful Bill Act (Pub. L. 119-21), W-2 employees can deduct qualified overtime compensation from federal taxable income using IRC § 225. The deduction is claimed on Schedule 1-A of Form 1040.
Step 1: Determine your overtime premium
The deductible amount is not your total overtime paycheck. It is only the premium: the wages above your regular rate. For standard time-and-a-half, this is the extra half. If your regular rate is $20 per hour and you receive $30 per hour for overtime, your overtime premium is $10 per hour. Multiply $10 by your overtime hours to get your qualified overtime compensation.
Step 2: Apply the deduction cap
The deductible amount is capped at $12,500 for single and head of household filers. For married couples filing jointly, the cap is $25,000 per joint return. If your overtime premium is less than the cap, you deduct only what you earned.
Compensatory time off does not qualify. If your employer gives you comp time instead of cash for overtime hours, that is not qualified overtime compensation under IRC § 225. Only cash wages paid as overtime premium qualify. FLSA-required cash overtime must actually be received.
Step 3: Apply the phase-out (if applicable)
If your MAGI exceeds $150,000 (single, head of household) or $300,000 (married filing jointly), the deduction is reduced. For every $1,000 of MAGI above the threshold, the deductible amount is reduced by $100. For single filers, the deduction reaches zero at approximately $275,000 MAGI. For MFJ filers, it reaches zero at approximately $550,000 MAGI.
Step 4: Calculate your income tax savings
Multiply your final deductible amount by your federal marginal income tax rate. A factory worker in the 22% bracket with $5,000 in qualified overtime premium and MAGI below the phase-out threshold saves $1,100 in federal income tax.
Step 5: Understand what is NOT reduced
FICA taxes still apply to all overtime wages. Your employer withholds Social Security (6.2%) and Medicare (1.45%) on the full overtime paycheck, including the premium portion. This deduction has no effect on payroll taxes.
What Counts as Qualified Overtime Compensation
Only overtime pay required by Section 7 of the Fair Labor Standards Act (FLSA) qualifies. This means overtime paid to non-exempt employees for hours worked beyond 40 in a workweek, at a rate not less than 1.5 times their regular rate.
The deductible amount is specifically the excess above the regular rate. If you earn $18 per hour regular and $27 per hour for overtime, the qualified overtime compensation is $9 per overtime hour, not $27.
The following do not qualify as qualified overtime compensation under IRC § 225:
- Voluntary overtime premiums paid by employers above the FLSA minimum. Only FLSA-required overtime qualifies.
- Shift differentials, hazard pay, or bonuses that are not FLSA overtime
- Extra hours pay for salaried employees classified as exempt from FLSA overtime
- Income from self-employment, partnerships, or S-corporation distributions
- Overtime-equivalent pay for independent contractors
If you are unsure whether your overtime qualifies, check whether your employer is required by FLSA to pay it. If overtime is paid voluntarily or under contract without a legal FLSA obligation, it likely does not qualify.
Phase-Out: How It Works Above $150,000
The phase-out reduces the deduction for higher-income filers. The reduction is gradual: $100 for every $1,000 of MAGI above the threshold. Because the single/HOH cap is $12,500, the deduction reaches zero after $125,000 of additional MAGI above the threshold.
Phase-Out Example: Single Filer, $200,000 MAGI
MAGI above $150,000 threshold$50,000
Phase-out reduction (50 steps × $100)$5,000
Reduced cap after phase-out$7,500
Overtime premium earned$4,200
Final deductible amount$4,200
In this example, the phase-out reduces the $12,500 cap to $7,500. The filer's actual overtime premium of $4,200 is below $7,500, so the phase-out has no practical effect. The phase-out only reduces actual savings when overtime premium income is close to or above the reduced cap.
Phase-Out Example: MFJ, $400,000 MAGI
MAGI above $300,000 threshold$100,000
Phase-out reduction (100 steps × $100)$10,000
Reduced cap after phase-out ($25,000 − $10,000)$15,000
Overtime premium earned$12,500
Final deductible amount$12,500
Confirmed vs. Pending Guidance
IRC §225 is enacted law. Most implementation rules are confirmed. The key pending items involve comp time and W-2 Box 12 reporting.
Confirmed by Statute (IRC §225)
Deduction cap$12,500 single/HOH · $25,000 MFJ per joint return Confirmed
Deduction typeAbove-the-line. Claimed on Schedule 1-A. Confirmed
Who qualifiesW-2 employees covered by FLSA §7 only. No self-employment equivalent. Confirmed
What qualifiesOvertime premium only — the excess above the regular rate. For 1.5× OT, only the 0.5× half qualifies. Confirmed
Phase-out threshold$150,000 MAGI single/HOH · $300,000 MAGI MFJ Confirmed
Phase-out rate$100 reduction per $1,000 MAGI over threshold Confirmed
Fully phased out at~$275,000 MAGI single/HOH · ~$550,000 MAGI MFJ Confirmed
FICA (Social Security + Medicare)Still applies to all overtime wages in full. Not reduced by §225. Confirmed
MFS filersDisqualified. No workaround. Confirmed
SunsetTY 2025–2028. Expires December 31, 2028. Confirmed
Pending IRS guidance: Comp time in lieu of OT pay: IRS has not clarified whether public employees receiving comp time under FLSA §207(o) qualify. W-2 Box 12 Code TT reporting is required starting TY 2026 (Box 14 is voluntary for TY 2025 under transitional relief). State conformity: no state has confirmed conformity as of April 2026. Provisional
Who Benefits Most
Likely Gets Meaningful Benefit
Hourly manufacturing, construction, and healthcare workers with $10,000–$12,500 in annual overtime premiumHits the cap. At 22%–24% bracket: saves $2,200–$3,000 in federal income tax.
Single earners with MAGI under $150,000Full deduction available. No phase-out reduction.
Workers regularly scheduled for significant overtime hoursHigher premium hours = larger deductible amount, up to the cap.
Gets Little or No Benefit
FLSA-exempt salaried employeesNo legally required FLSA overtime means no qualifying overtime premium. Voluntary extra-hours pay does not qualify.
Independent contractors and self-employed workersIRC §225 is employee-only. No SE equivalent exists.
Employees with MAGI above ~$275,000Deduction fully phased out at that level for single filers.
Workers whose employer provides only comp timePending IRS guidance. Currently uncertain whether comp time qualifies.
How This Differs from the Tip Deduction
The overtime deduction (§225) and tip deduction (§224) use the same MAGI phase-out thresholds and can both be claimed in the same year. The caps and eligibility rules differ significantly.
§225 (Overtime) vs. §224 (Tips) — Key Differences
Deduction capOvertime: $12,500 single / $25,000 MFJ · Tips: $25,000 per return regardless of filing status
Who qualifiesOvertime: W-2 employees (FLSA §7) only · Tips: Employees + qualifying self-employed
What qualifiesOvertime: Premium portion only (the 0.5× above regular rate) · Tips: Voluntary customer tips in qualifying occupations
SSTB exclusionOvertime: N/A (employee-only) · Tips: SSTBs excluded for self-employed
Phase-out startsBoth: $150,000 MAGI single/HOH · $300,000 MAGI MFJ
Fully phased out atOvertime: ~$275,000 single / ~$550,000 MFJ · Tips: $400,000 single / $550,000 MFJ
Can claim both?Yes. §224 and §225 are separate deductions on the same Schedule 1-A. Both caps apply independently.
Real-World Scenarios
Warehouse Worker, Single, TY 2025 — $22/hr regular rate, 280 OT hours
Regular hourly rate$22.00/hr
Overtime rate (1.5×)$33.00/hr
Overtime premium (0.5× = $11.00/hr)$11.00/hr
Total overtime premium (280 hrs × $11.00)$3,080
Cap check ($12,500 single)Under cap
MAGI phase-out check ($64,000 vs $150,000)No phase-out
Deductible overtime compensation$3,080
Federal marginal rate (22% bracket)22%
Federal income tax savings$677.60
FICA on total OT wages ($33 × 280 = $9,240)$707 still owed
This worker saves approximately $678 in federal income tax. The full overtime wages remain on Form W-2 and are subject to FICA. For TY 2025, the IRS granted employer penalty relief under Notice 2025-69 for overtime reporting. Employers may use Box 14 voluntarily. Starting TY 2026, employers must report qualified overtime compensation in W-2 Box 12 using Code TT. The worker claims the deduction on Schedule 1-A.
Scenario 2: Nurse, Single, $90,000 Base, $10,000 OT Premium — MAGI $100,000 (Derived)
Overtime premium earned$10,000
Cap check ($12,500 single)Under cap — full amount qualifies
MAGI phase-out check ($100,000 vs $150,000)No phase-out
Deductible overtime compensation$10,000
Federal marginal rate (22% bracket)22%
Federal income tax savings$2,200 Derived
FICA on OT wagesUnchanged — §225 does not reduce FICA
Scenario 3: Factory Worker, MFJ, $55,000 Base, $8,000 OT Premium — Household MAGI $130,000 (Derived)
Overtime premium earned$8,000
Cap check ($25,000 MFJ)Under cap — full amount qualifies
MAGI phase-out check ($130,000 vs $300,000 MFJ)No phase-out
Deductible overtime compensation$8,000
Federal marginal rate (22% bracket)22%
Federal income tax savings$1,760 Derived
FICA on OT wagesUnchanged — employer withholds FICA on all OT wages
LMN Tax Inc. — Client Pattern
At LMN Tax Inc., the most common error we see with the overtime deduction is treating the full overtime paycheck as the deductible amount. A client earning $25 per hour regular rate who works 300 overtime hours receives total overtime pay of $11,250. But the deductible amount is only the premium: $12.50 multiplied by 300 hours equals $3,750. Overstating this figure to $11,250 would be a material error on Schedule 1-A. We also see clients with two part-time jobs attempt to claim $12,500 per employer. The cap is per return, not per employer.
Married Filing Separately clients sometimes ask if there is a workaround. There is not. The statute explicitly disqualifies MFS filers with no exception. For clients approaching the phase-out threshold at $150,000 MAGI, the reduction is $100 per $1,000 above the threshold. A client with $175,000 MAGI sees a $2,500 reduction from the $12,500 cap, leaving an $10,000 effective cap. The phase-out math is straightforward, but it must be applied before claiming the deduction on Schedule 1-A.
For TY 2026 and beyond, clients should retain documentation from their employer showing the qualified overtime amount, since W-2 Box 12 Code TT will be the primary reconciliation point. For TY 2025, the IRS granted transitional relief under Notice 2025-69: any employer-provided statement is acceptable. Clients who cannot obtain a breakdown should use their pay stubs to calculate the premium manually using the regular rate and FLSA overtime hours.
Is Overtime Taxed at a Higher Rate?
No. Overtime wages are taxed at the same marginal rates as regular pay. Withholding may appear higher on an overtime paycheck because employers often withhold at the supplemental flat rate (22% for amounts under $1 million). That is a withholding method, not a higher tax rate.
Your actual federal income tax is calculated on your full-year income when you file. If your employer withheld more than required, the excess comes back as a refund. The IRC § 225 deduction reduces the taxable income portion of your overtime premium further — it does not create a separate tax rate.
Example: Withholding vs. Actual Tax
Regular hourly rate$22.00/hr
Overtime rate (1.5×)$33.00/hr
Overtime premium (deductible portion)$11.00/hr
Employer withholding method on OT22% supplemental rate
Filer's actual marginal bracket22% (same)
IRC § 225 deduction reduces taxable incomeYes — on premium portion only
The 22% withholding on a supplemental payment is a coincidence when the filer is already in the 22% bracket. A filer in the 12% bracket will see overwithholding on overtime paychecks and should expect a refund on that portion at filing.
When This Deduction Does Not Apply
- Self-employed workers and independent contractors: IRC § 225 applies only to W-2 employees covered by FLSA overtime requirements. There is no self-employment equivalent.
- FLSA-exempt salaried employees: most salaried employees classified as exempt do not receive FLSA-required overtime. Extra hours paid voluntarily or under a company policy do not qualify.
- Married Filing Separately filers: the deduction is legally disqualified. There is no workaround under IRC § 225.
- MAGI above the phase-out elimination point: single and HOH filers with MAGI above approximately $275,000 receive no deduction. MFJ filers phase out at approximately $550,000.
- Voluntary overtime above the FLSA minimum: if your employer pays 2× by policy but is only required to pay 1.5× by law, only the FLSA-required premium qualifies. The extra above 1.5× is not qualified overtime compensation.
- After December 31, 2028: the deduction expires. Overtime earned in TY 2029 and beyond receives no federal deduction unless Congress acts to extend it.
State Tax Conformity
The IRC § 225 overtime deduction is a federal income tax deduction only. Most states have not enacted conforming legislation. This means your state income tax is calculated on your full income including the overtime premium, even if you claim the federal deduction.
Check your state's department of revenue website for the current conformity status. As of April 2026, no major state has confirmed full conformity with the OBBBA overtime deduction.
State conformity status changes as state legislatures act. Verify current status with your state's tax authority before filing a state return. Provisional
FICA: What Still Applies to Overtime Wages
The OBBBA overtime deduction reduces federal income tax only. Payroll taxes are unchanged.
Employee FICA: All overtime wages remain subject to Social Security tax (6.2%) and Medicare tax (1.45%). Your employer withholds the employee share on the full overtime amount. Social Security tax applies up to the wage base ($176,100 for TY 2025; $184,500 for TY 2026). Medicare tax applies to all wages with no cap.
State Income Tax: As of March 2026, most states have not conformed to the federal overtime income deduction. If your state has not enacted a matching provision, overtime income remains fully taxable at the state level. Verify your state's conformity status before assuming any state savings.
Additional Medicare Tax: Taxpayers with wages above $200,000 (single) or $250,000 (MFJ) owe an additional 0.9% Medicare surtax on wages above those thresholds. The overtime deduction does not reduce wages for purposes of this calculation.
Frequently Asked Questions
What is the $12,500 cap on the overtime deduction?
Under IRC § 225, the maximum deduction is $12,500 per return for single filers and head of household filers. For married couples filing jointly, the cap is $25,000 per joint return. The deductible amount is the lesser of actual qualified overtime premium earned or the applicable cap. If your overtime premium is below the cap, you deduct only what you actually received.
Does the overtime deduction reduce my Social Security or Medicare taxes?
No. IRC § 225 reduces federal income tax only. Social Security tax (6.2%) and Medicare tax (1.45%) still apply to all overtime wages, including the premium portion. Your employer withholds FICA on the full overtime paycheck regardless of this deduction.
What exactly counts as qualified overtime under IRC § 225?
Qualified overtime compensation is pay required under Section 7 of the Fair Labor Standards Act that exceeds your regular rate of pay. For standard time-and-a-half overtime, only the premium portion qualifies. If your regular rate is $20 per hour and you are paid $30 per hour for overtime, the deductible amount is $10 per overtime hour. The full $30 is not deductible. Voluntary overtime premiums above the FLSA minimum do not qualify.
I work overtime for two employers. Does the $12,500 cap apply per employer or in total?
The cap applies to your total qualified overtime compensation across all employers combined. If you earn $8,000 in overtime premium from one employer and $6,000 from a second, your total is $14,000 but your deduction is capped at $12,500 (single filer). You cannot claim a separate $12,500 cap per employer.
I am self-employed. Does the overtime deduction apply to me?
No. IRC § 225 applies only to W-2 employees covered by the Fair Labor Standards Act. Self-employed individuals and independent contractors are not subject to FLSA overtime requirements. There is no self-employment equivalent to this deduction. The no tax on tips deduction under IRC § 224 has a modified self-employed version, but the overtime deduction does not.
Can I claim the overtime deduction if I take the standard deduction?
Yes. The IRC § 225 overtime deduction is above the line. It reduces your adjusted gross income before the standard deduction is applied. You do not need to itemize. You claim it on Schedule 1-A (Form 1040).
What are the income phase-out limits for the overtime deduction?
The deduction phases out when MAGI exceeds $150,000 for single and head of household filers, and $300,000 for married filing jointly. The deduction is reduced by $100 for every $1,000 of MAGI above the threshold. For single filers, the deduction reaches zero at approximately $275,000 MAGI. For MFJ filers, it reaches zero at approximately $550,000 MAGI.
How do I claim the overtime deduction on my tax return?
You claim the qualified overtime compensation deduction on Schedule 1-A (Additional Deductions), filed with Form 1040. For TY 2025, employers are not required to separately report overtime premium on Form W-2. Starting TY 2026, employers must report qualified overtime in W-2 Box 12 using Code TT.
When does the overtime deduction expire?
The deduction applies to tax years 2025 through 2028. Under IRC § 225, no deduction is allowed for any tax year beginning after December 31, 2028. Congress would need to act to extend or make it permanent.
I am a salaried employee. Can I claim the overtime deduction?
It depends on whether you actually receive FLSA-required overtime pay. Most salaried employees classified as exempt from FLSA do not receive legally required overtime. If your employer pays extra hours voluntarily or under a contract but you are FLSA-exempt, that pay is not qualified overtime compensation under IRC § 225. Non-exempt salaried workers who do receive FLSA-required overtime can qualify.
What if I am married but file separately?
Married Filing Separately filers cannot claim this deduction. IRC § 225 requires that a married taxpayer file a joint return to be eligible. There is no workaround for this restriction.
Next Steps
If you are a non-exempt W-2 employee who received FLSA-required overtime in TY 2025 or TY 2026, use this calculator to estimate your deduction and verify your marginal rate. Then claim the deduction on Schedule 1-A when filing your return.
If your MAGI is approaching $150,000 (single) or $300,000 (MFJ), run the phase-out calculation before filing. The deduction reduces $100 for each $1,000 above the threshold. At $200,000 MAGI single, the cap falls to $7,500.
If you also earned tip income, you may claim both the IRC § 225 overtime deduction and the IRC § 224 tip income deduction on the same Schedule 1-A return, subject to each deduction's own cap and phase-out. Use the No Tax on Tips Calculator to estimate combined savings. For full tax preparation, contact LMN Tax Inc.
After calculating your deduction, use the Refund Date Estimator to estimate how a reduced federal tax liability may affect your expected refund timing. The overtime deduction is one of six OBBBA provisions for TY 2025–2028. If you also have tip income, a qualifying vehicle loan, or children, other OBBBA provisions may apply on the same return.
Related OBBBA Tools and Guides