What “no tax on overtime” actually means
The 2025 tax law (P.L. 119-21) created a federal deduction for qualified overtime compensation for tax years 2025 through 2028. It is a deduction, not an exemption: it lowers your taxable income on your Form 1040, and the tax you save depends on your bracket. Your overtime pay itself is still wages.
Only the premium counts
Qualified overtime is the premium the Fair Labor Standards Act requires: the part of time-and-a-half above your regular rate, on hours over 40 in a workweek.
Example. $25 an hour, 8 overtime hours a week for 50 weeks:
- Overtime hours: 8 × 50 = 400
- Overtime pay: 400 × $37.50 = $15,000
- Qualified premium: 400 × $12.50 = $5,000
The $10,000 of straight-time pay inside those overtime hours is not deductible. Neither, generally, is overtime you get only because of a state rule (such as California’s daily overtime), a union contract or company policy, or overtime for jobs the FLSA exempts.
Cap and phase-out for 2026
- Cap: $12,500 per return, or $25,000 if married filing jointly.
- Phase-out: the cap drops by $100 for each full $1,000 of modified adjusted gross income above $150,000 ($300,000 joint). A single filer with $160,000 of MAGI can deduct up to $11,500; at $275,000 the deduction is gone.
- Married filing separately: not allowed. You must file jointly.
You can take the deduction whether you itemize or take the standard deduction ($16,100 single, $32,200 joint, $24,150 head of household in 2026).
How much tax it saves
The calculator runs your 2026 federal return twice, with and without the deduction, and shows the difference. In the example above, a single filer earns $52,000 of straight time plus $15,000 of overtime, so $67,000 of wages. Without the deduction, taxable income is $67,000 − $16,100 = $50,900 and the tax is $5,910. With the $5,000 deduction, taxable income is $45,900 and the tax is $5,260. Saving: $650, because $500 of the deduction comes off the 22% bracket and $4,500 off the 12% bracket.
The tool assumes 40 regular hours in each of 52 weeks plus your overtime. If you work fewer weeks, add or subtract the difference under other income.
Your paycheck doesn’t change
Payroll withholding follows the IRS tables, and those don’t include this deduction. Unless you act, each check is withheld exactly as before, and the saving arrives as a bigger refund (or a smaller amount due) when you file.
If you’d rather have the money during the year, give your employer a new W-4 and enter your expected deduction in Step 4(b) using the deductions worksheet. The calculator shows roughly how much less would be withheld per biweekly check. Don’t overestimate: if your overtime falls short, you could owe at filing time.
What still applies
- Social Security and Medicare: 6.2% (up to the $184,500 wage base) and 1.45% on all overtime pay, deduction or not.
- State income tax: many states don’t follow this deduction, and the rules vary. Some have adopted it, some have their own smaller version, and some have said no. Where we could confirm a state’s treatment, the calculator says so; otherwise, assume your state taxes your overtime until its tax agency says it doesn’t.
How it’s reported
Employers are expected to report qualified overtime separately for 2026 (on Form W-2 or a statement). Keep pay stubs that show your overtime hours and rate, so you can check the figure.