Yes, overtime pay is taxable. It’s wages, taxed at the same rates as your regular pay, and there is no separate “overtime tax.” The 2025–2028 “no tax on overtime” rule does not make overtime tax-free: it is a federal income-tax deduction for the extra half of overtime pay required by federal law, capped at $12,500 ($25,000 for joint filers) and phased out at higher incomes. Here is what it changes and how to estimate yours.
Is overtime taxed differently from regular pay?
No. Overtime is taxed like the rest of your wages. There is no special overtime tax rate. IRS Publication 15 puts it plainly: “Overtime compensation is subject to social security, Medicare, and FUTA taxes. Overtime is also subject to federal income tax withholding.”
Your tax is based on total taxable income, so overtime adds to the total. If overtime lifts you into the next bracket, only the dollars above the line move up. Suppose your taxable income sits at $47,500 and overtime adds $3,000. The first $975 stays in the 12% bracket and only the last $2,025 is taxed at 22%, about $200 more than if all of it had stayed at 12%. The single-filer line between those brackets is $48,475 of taxable income for 2025 and $50,400 for 2026, after the standard deduction (IRS).
A big overtime check can look over-taxed, but the flat 22% many people blame is optional. Employers may treat overtime as regular wages and withhold normally, or treat it as supplemental wages and either withhold a flat 22% or add it to that period’s regular wages and withhold on the total. Either way it reconciles when you file. A $500 overtime payment withheld at the flat rate comes to about $110 in federal tax plus $38.25 in Social Security and Medicare at 7.65%, before any state tax. That is withholding, not your final tax.
The 2025–2028 change: a deduction, not an exemption
The law behind this is the One Big Beautiful Bill Act, also called the Working Families Tax Cuts, signed July 4, 2025 as Public Law 119-21. It created the deduction for “qualified overtime compensation” for tax years 2025 through 2028. The IRS states the key point directly: the deduction “does not mean that overtime compensation is excluded or exempt from gross income.” Your overtime stays taxable income, and the deduction only subtracts part of it from the income the federal government taxes.
A deduction is not a dollar-for-dollar cut: $1,000 at a 22% marginal rate saves about $220. It is taken below the line, on line 13b of the 2025 Form 1040, so it lowers your taxable income but not your adjusted gross income. Since it does not reduce MAGI, claiming it will not help you get under the $150,000 phase-out threshold.
| Tax on your overtime | Does the 2025–2028 deduction change it? |
|---|---|
| Federal income tax | Yes — it reduces taxable income, up to the cap |
| Social Security and Medicare (FICA) | Still applies — Social Security up to the annual wage base ($176,100 in 2025, $184,500 in 2026), Medicare on all wages |
| Federal income tax withholding | Not automatically — only if you update your W-4 |
| State and local income tax | Depends on your state — check your state tax agency |
The federal rules come from IRS FS-2026-13 (August 2026). The U.S. Treasury reported that more than 29 million filers claimed the deduction through the April 2026 filing deadline, averaging just over $3,100.
What counts as qualified overtime compensation
Qualified overtime compensation is overtime that the federal Fair Labor Standards Act (FLSA) requires and that is above your regular rate. In one line:
Qualified premium = one-half of your regular rate × FLSA overtime hours. Because your overtime pay at time-and-a-half already contains those straight-time hours, that premium also works out to one-third of your total time-and-a-half overtime pay.
The Department of Labor sets the general rule: time and a half for hours over 40 in a workweek, for non-exempt employees. Anything beyond that rule is not deductible.
| Overtime pay you might receive | Counts toward the deduction? |
|---|---|
| The FLSA premium for hours over 40 in a workweek | Yes — this is the “half” |
| Overtime required by your state but not by federal law (daily overtime) | No |
| Overtime required only by a union contract or company policy | No |
| Double time or holiday/weekend premiums above the FLSA half | No — only the portion that is FLSA-required overtime counts |
| Any overtime pay to an FLSA-exempt employee | No |
The IRS uses a double-time example to show the limit. An employee paid $20 an hour works 10 overtime hours at twice their regular rate, so the employer pays $400. The FLSA required only $300 for those hours: $200 of straight time plus a $100 premium. The qualified overtime compensation is that $100. The extra $100 the employer paid above that does not qualify.
How much can you deduct? The cap, the phase-out, and a worked example
Two limits apply, in order. The IRS figures your MAGI for both in Part I of Schedule 1-A.
- Cap. The deduction tops out at $12,500 a year for single and head-of-household filers, or $25,000 for a married couple filing jointly.
- Phase-out. Once your MAGI passes $150,000 ($300,000 joint), the deduction drops $100 for each full $1,000 over. Form 1040 Schedule 1-A subtracts your threshold from your MAGI, divides by $1,000, rounds down to a whole number, and multiplies by $100. Because the excess rounds down, being $999 over the line costs you nothing. With the full cap, the deduction reaches zero at $275,000 MAGI for single filers and $550,000 for joint filers.
Here is a time card carried all the way through, using 2025 figures, for someone paid $25 an hour who works 45 hours every week for 52 weeks. The logic is identical for 2026; only the brackets move.
| Line | Amount |
|---|---|
| Regular pay | 40 hours × $25.00 = $1,000.00/week |
| Overtime pay | 5 hours × $37.50 = $187.50/week |
| Overtime premium (the half) | 5 hours × $12.50 = $62.50/week |
| Annual qualified premium | $62.50 × 52 = $3,250 |
| Deduction | $3,250 (under the $12,500 cap; MAGI under $150,000) |
| Estimated federal income tax saved | $3,250 × 12% ≈ $390 |
Those figures assume a single filer on the standard deduction, all 52 weeks at 45 hours, no unpaid weeks, and a 12% marginal bracket. The saving is roughly your deduction multiplied by your marginal rate, so at 22% the same $3,250 would save about $715. The 12% assumption holds for 2025: $61,750 of gross wages minus the $15,750 standard deduction leaves $46,000 of taxable income, under the 12% bracket’s $48,475 ceiling.
Where the limits bite, including joint filers:
| Situation | Qualified premium | MAGI | Deduction |
|---|---|---|---|
| Over the cap, single | $16,000 | under $150,000 | $12,500 |
| Partly phased out, single | $6,000 | $165,000 | $4,500 |
| Joint, partly phased out | $10,000 | $320,000 | $8,000 |
Read the middle row: $165,000 − $150,000 = $15,000, ÷ $1,000 = 15, × $100 = $1,500 off, leaving $4,500. To run your own numbers, use our No Tax on Overtime Calculator; for the hours and gross pay first, the Overtime Calculator.
Reducing your withholding during the year is a separate step. Your employer won’t withhold less unless you file an updated Form W-4: its Step 4(b) worksheet has a line for estimated qualified overtime compensation, up to $12,500 ($25,000 joint) but only if your total income is under $150,000 ($300,000 joint), and you enter just the “and-a-half” portion of time-and-a-half pay.
Reporting changed in 2026: check your W-2
For tax year 2025, employers were not required to report qualified overtime separately, and the IRS pointed people to the Schedule 1-A instructions to work out the amount themselves. For tax year 2026 and later, employers must report it on Form W-2 box 12, code TT, and you may deduct only what is reported there. If the amount is missing or wrong, you must request a corrected Form W-2c; the IRS does not allow a substitute Form 4852 to be used instead. Overtime stays taxable in 2026 and the deduction stays in effect; only the reporting is new.
If you filed a 2025 return without claiming the deduction, you can still claim it by filing an amended return, Form 1040-X, with Schedule 1-A attached.
Who qualifies, and who does not
You can claim the deduction if you’re an FLSA overtime-eligible (non-exempt) employee who received FLSA-required overtime, you have a valid Social Security number, and, if you’re married, you file a joint return. Married filing separately gets $0. You can claim it whether you itemize or take the standard deduction. If you think you’ve been misclassified as a contractor, that is a question for the Department of Labor.
If your pay is unusual
- Salaried but non-exempt. Overtime still applies, but your regular rate depends on the hours the salary is meant to cover, not the hours you happened to work. Under 29 CFR 778.113, a salary for a 40-hour week is divided by 40, so a $1,000 weekly salary gives a $25-an-hour regular rate. Your employer makes that calculation.
- Bonuses, shift differentials, commissions. Your “regular rate” is more than your base wage. The IRS notes it includes “all remuneration for employment,” so these can raise the rate and change the premium.
- Alternative workweeks. The 40-hour rule is the general case. Hospital staff on a 14-day, 80-hour schedule, and police officers and firefighters on special schedules, are overtime-eligible past different thresholds, and the deduction follows those thresholds. Public employees paid in comp time instead of cash count it only when the comp time is used as paid time off or cashed out on leaving, not when it is earned. See questions 17 and 18 in the IRS FS-2026-13.
Frequently asked questions
Does overtime from two jobs count toward the same cap? Yes. The cap is per return, not per employer, so both amounts go on one return and the $12,500 (or $25,000 joint) cap applies once. From 2026 each employer reports its own amount in box 12, code TT.
I get a 1099, not a W-2. Can I claim it? Usually no. The deduction requires FLSA overtime-eligible employee status. The rare exception is a worker who is an employee under the FLSA but treated as a contractor for tax purposes; then the amount appears on Form 1099-MISC box 14 or Form 1099-NEC box 1d.
This article is general information, not legal, tax or payroll advice. Figures are estimates and tax rules vary by state. Confirm your own situation with the IRS materials linked above, your state tax agency, or a tax professional. Last updated October 11, 2026.