What the "no tax on overtime" deduction actually covers
The One Big Beautiful Bill Act (OBBBA), signed in July 2025, created a temporary federal income tax deduction for tax years 2025 through 2028 for "qualified overtime compensation." According to the IRS, that means only the premium portion of overtime pay -- the extra half of time-and-a-half -- and only overtime that Section 7 of the federal Fair Labor Standards Act (FLSA) actually requires. See the IRS's own explanation at What to know about the no tax on overtime deduction (IRS.gov).
Take the IRS's own example: $15,000.00 of overtime pay earned at time-and-a-half. Two-thirds of that ($10,000.00) is pay you'd have earned anyway at your regular rate -- it was never part of this deduction. The remaining one-third, $5,000.00, is the qualified overtime premium, and that's the number this calculator starts from.
How to calculate the deduction: cap and phase-out
Two limits apply, in order:
- Yearly cap: $12,500.00 (single or head of household) or $25,000.00 (married filing jointly). $16,000.00 of premium is capped at $12,500.00 before anything else is applied.
- MAGI phase-out: reduced $100 for every full $1,000 of modified adjusted gross income over $150,000.00 ($300,000.00 joint); Schedule 1-A rounds the excess down to whole thousands. $6,000.00 of premium with a MAGI $15,000.00 over the threshold loses $1,500.00, leaving $4,500.00.
Enough income above the threshold phases the deduction out completely: with a MAGI $55,000.00 over the threshold, the $5,000.00 premium is reduced to $0.00.
The deduction lowers your taxable income, not your tax bill directly, so the estimated saving is the deduction multiplied by your marginal federal tax rate: $5,000.00 of deduction at a 22% marginal rate saves about $1,100.00 in federal income tax.
Worked examples
| Situation | Premium | MAGI | Deduction | Est. tax saving |
|---|---|---|---|---|
| Under the phase-out, single | $5,000.00 | $90,000.00 | $5,000.00 | $1,100.00 |
| Under the phase-out, joint | $8,000.00 | $180,000.00 | $8,000.00 | $1,760.00 |
| Above the cap, single | $16,000.00 | $95,000.00 | $12,500.00 | $3,000.00 |
| Partly phased out, single | $6,000.00 | $165,000.00 | $4,500.00 | $1,080.00 |
| Fully phased out, single | $5,000.00 | $205,000.00 | $0.00 | $0.00 |
| Married filing separately | $5,000.00 | $90,000.00 | $0.00 | – |
Eligibility: who qualifies
- FLSA overtime only: the extra half of time-and-a-half pay required by federal law (generally, hours over 40 in a workweek). Overtime required only by your state, a union contract, or company policy does not qualify.
- Valid Social Security number: required for you (and your spouse, filing jointly).
- Filing status: married taxpayers must file a joint return. Married filing separately gets $0.00 -- no deduction at all, regardless of income or overtime.
- Itemizing not required: available whether you itemize or take the standard deduction.
What this deduction does not change
This is a federal income tax deduction only. It does not reduce Social Security or Medicare (FICA) withholding, and most states still tax overtime pay under their own rules -- check your state's tax agency if that matters to your take-home pay. It also doesn't change how your employer calculates or pays overtime itself; for that math, see the overtime calculator.
More work-hours tools
- Overtime calculator: time-and-a-half and double-time gross pay from your hourly rate and hours worked.
- Time card calculator: add up a weekly timesheet with breaks, overtime and pay.
- Salary to hourly calculator: convert an annual salary to an hourly rate, useful for the "regular rate" this deduction is based on.
Frequently asked questions
What is the "no tax on overtime" deduction?
A temporary federal income tax deduction (2025-2028) from the One Big Beautiful Bill Act, signed into law in July 2025. It lets eligible workers deduct their "qualified overtime compensation" -- the extra half of time-and-a-half overtime pay required by federal law -- from federal taxable income, up to $12,500.00 a year ($25,000.00 married filing jointly).
Is it the full overtime pay, or just part of it?
Just part of it: only the "premium," the extra half in time-and-a-half. If your overtime pay (at 1.5x your regular rate) was $15,000 for the year, the qualified premium is $15,000 ÷ 3 = $5,000.00 -- that's the IRS's own example. The other two-thirds of your overtime pay (the part you'd have earned anyway at your regular rate) was never tax-free to begin with.
Does overtime required by my state, union contract or company policy count?
Only if it's also required by Section 7 of the federal Fair Labor Standards Act (FLSA) -- generally, time-and-a-half for hours over 40 in a workweek. Overtime your state, union contract or employer pays beyond what the FLSA itself requires (extra daily overtime, holiday premiums, contractual double-time, and so on) does not qualify for this deduction, even though it's still taxed the same way it always was.
What is the maximum deduction?
$12,500.00 per year for single filers (and head of household), or $25,000.00 for married couples filing a joint return. Above that, the extra premium is not deductible.
Does the deduction phase out at higher incomes?
Yes. It phases out $100 for every full $1,000 of modified adjusted gross income (MAGI) over $150,000.00 ($300,000.00 married filing jointly). For example, $6,000.00 of premium with a MAGI $15,000.00 over the threshold loses $1,500.00, leaving a $4,500.00 deduction. Partial thousands don't count: Schedule 1-A rounds the excess down to whole thousands, so a MAGI $999 over the threshold loses nothing. Enough MAGI above the threshold phases the deduction out completely.
Do I need to itemize to claim it?
No. It is available whether you itemize deductions or take the standard deduction.
What if I file married filing separately?
You aren't eligible at all. The law requires married taxpayers to file a joint return to claim this deduction -- filing separately means a $0 deduction no matter how much qualified overtime premium you earned.
Do I need a Social Security number to claim it?
Yes, a valid Social Security number is required (for you, and your spouse if you file jointly). It isn't available to taxpayers who file with an ITIN instead.
Does this reduce my Social Security, Medicare or state taxes too?
No. It only reduces federal income tax. Your overtime pay is still fully subject to Social Security and Medicare (FICA) withholding, and to state and local income tax in most states, exactly as before.
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