How the “no tax on overtime” deduction really works
The One Big Beautiful Bill Act, which the IRS now also calls the Working Families Tax Cuts, created a new federal deduction for qualified overtime compensation. It runs for four tax years, 2025 through 2028. Despite the slogan, your overtime is still taxed. Here is what actually changed, and what this no tax on overtime calculator measures:
- Only the premium counts. When you work overtime at time and a half, the “half” is the qualified part. The regular-rate part of the hour is taxed like the rest of your wages.
- It is a deduction, not an exemption. You claim it on your federal return on Schedule 1-A. It lowers your taxable income; it does not stop your employer from withholding tax.
- It is capped. The most you can deduct is $12,500 a year, or $25,000 on a joint return.
- It phases out for higher incomes. Above $150,000 of modified adjusted gross income ($300,000 joint), the cap shrinks by $100 for each full $1,000 over the line.
- It only touches federal income tax. Social Security and Medicare taxes still apply to every overtime dollar, and states set their own rules.
Which overtime qualifies
Qualified overtime is the overtime premium that the federal Fair Labor Standards Act (FLSA) requires: at least one and a half times your regular rate for hours over 40 in a workweek. That leads to a few rules people often miss:
- You must be a non-exempt worker under the FLSA. Most hourly employees are. Many salaried managers and professionals are exempt and do not get FLSA overtime, so they have no qualified overtime to deduct.
- Double time only counts at half time. If your employer pays 2x, the extra half-rate beyond what federal law requires is not qualified.
- State-only and contract overtime does not count. Daily overtime required only by state law, like California’s after-8-hours rule, or overtime paid under a union contract for hours that are not over 40 in the week, falls outside the deduction.
- You need a Social Security number valid for work, and if you are married you must file jointly.
Example: one overtime hour at $24
You earn $24 an hour and work one hour past 40. Your employer pays $36 for that hour: $24 of regular pay and $12 of premium. Only the $12 is qualified overtime. Work 6 extra hours a week for 48 weeks and you have 288 overtime hours, $10,368 of overtime pay, and $3,456 of qualified overtime to deduct.
The calculation, step by step
The no tax on overtime calculator follows the order used on Schedule 1-A of Form 1040:
Qualified overtime = regular rate × 0.5 × overtime hours
Capped amount = smaller of qualified overtime or $12,500 ($25,000 joint)
Phase-out = $100 × whole thousands of MAGI over $150,000 ($300,000 joint)
Deduction = capped amount − phase-out (not below $0)
To estimate the tax you save, it then works out your taxable income (your income minus the standard deduction of $16,100 single or $32,200 joint for 2026; $15,750 or $31,500 for 2025) with and without the deduction, and runs both through that year’s tax brackets. The difference is the saving.
Note the order. The cap applies first, and the phase-out comes off the capped amount. A single filer with $20,000 of qualified overtime and $175,400 of income gets $12,500 − $2,500 = $10,000. Some calculators reduce the cap first and arrive at a different answer; the Schedule 1-A method is the one the IRS form uses.
How much will you save? Examples for 2026
Each row assumes a 40-hour base week for 52 weeks plus overtime at time and a half for 50 weeks, the standard deduction, and no other income.
| Hourly pay | OT hours a week | Overtime pay | Deduction | Tax saved |
|---|---|---|---|---|
| $18, single | 5 | $6,750 | $2,250 | $270 |
| $25, single | 8 | $15,000 | $5,000 | $650 |
| $32, single | 10 | $24,000 | $8,000 | $1,760 |
| $32, married filing jointly | 10 | $24,000 | $8,000 | $960 |
| $45, single | 12 | $40,500 | $12,500 (cap) | $2,996 |
| $60, single | 15 | $67,500 | $8,300 (phased out) | $1,992 |
Two patterns stand out. The same overtime saves a single filer more than a married couple, because the couple’s income sits in a lower bracket. And the deduction is worth the most to people in the 22% and 24% brackets who have not yet reached the phase-out.
The income phase-out, explained
Modified adjusted gross income (MAGI) for this deduction is your adjusted gross income, plus a few foreign and territory income exclusions that most people do not have. Once MAGI passes $150,000 ($300,000 joint), the capped deduction drops by $100 for every full $1,000 over the threshold. Partial thousands do not count, so $25,999 over the line reduces the deduction by $2,500, not $2,599.
| MAGI | Reduction | Deduction |
|---|---|---|
| $150,000 or less | $0 | $12,500 |
| $175,000 | $2,500 | $10,000 |
| $190,000 | $4,000 | $8,500 |
| $225,000 | $7,500 | $5,000 |
| $275,000 or more | $12,500 | $0 |
How to claim it on your return
- Find your qualified overtime. For 2026 and later, employers must report it separately on your year-end tax forms. For 2025, they were not required to, so many workers figure it from pay stubs: add up the premium portion of each overtime check. IRS Notice 2025-69 and the Schedule 1-A instructions describe the accepted methods.
- Fill in Schedule 1-A (Form 1040), the part for qualified overtime compensation. The same schedule handles the new tips, car loan interest and senior deductions.
- Carry the total to Form 1040. The deduction applies whether you take the standard deduction or itemize.
Keep the pay stubs that back up your number, especially for 2025, when the amount may not appear on your W-2.
Will my paycheck go up?
Not on its own. Your employer keeps withholding federal tax from overtime as usual, so for most workers the saving arrives as a bigger refund or a smaller balance due at tax time. If you would rather have the money through the year, you can give your employer a new Form W-4 and use the deductions worksheet for Step 4(b) to account for the overtime deduction you expect. Withhold too little and you could owe at filing time, so stay conservative with the estimate.
State taxes and FICA
This is a federal income tax break only. Social Security (6.2%, up to the yearly wage base) and Medicare (1.45%) are still taken from all overtime pay, and the calculator shows that amount so the full picture is clear. Each state decides whether its income tax follows the federal deduction. States that start their tax from federal taxable income may pick it up automatically; many states that start from federal AGI will not, because this deduction does not reduce AGI. Check your state revenue department’s guidance before counting on a state saving.
Want to see your overtime hours first? The hours calculator adds up a weekly time card and splits regular from overtime hours. To compare hourly and salaried offers, use the salary to hourly calculator. Tipped workers can check the companion no tax on tips calculator. Then run your numbers in the no tax on overtime calculator and copy the link to keep with your tax records.