If you earned overtime pay, you may qualify for the federal No Tax on Overtime deduction. This deduction allows eligible taxpayers to reduce their taxable income by the premium portion of qualified overtime pay.
In simple terms, you can deduct the extra amount you received for working overtime, not your entire overtime paycheck.
For most employees paid time-and-a-half, that's the additional half-rate paid above their regular hourly wage.
Important Things to Know
Before claiming this deduction, keep these key rules in mind:
- This is a tax deduction, not a tax exemption.
- Only the qualified overtime premium is deductible.
- Regular wages remain fully taxable.
- Overtime wages are still subject to Social Security and Medicare taxes (FICA).
- You can claim this deduction whether you take the standard deduction or itemize deductions.
Who Qualifies for the No Tax on Overtime Deduction?
To claim the deduction, all of the following requirements must be met:
- You received qualified overtime compensation under the Fair Labor Standards Act (FLSA).
- You have a valid Social Security number.
- If married, you must file a joint return.
- Married Filing Separately taxpayers are not eligible.
Your Modified Adjusted Gross Income (MAGI) must also fall within the applicable limits:
| Filing Status | MAGI Limit Before Phase-Out |
|---|---|
| Single | Under $150,000 |
| Head of Household | Under $150,000 |
| Qualifying Surviving Spouse | Under $150,000 |
| Married Filing Jointly | Under $300,000 |
The deduction begins to phase out when your income exceeds these thresholds.
When Does the Deduction Apply?
The deduction applies to qualified overtime compensation earned:
- On or after January 1, 2025
- Through December 31, 2028 (unless extended by Congress)
Taxpayers first claimed the deduction on 2025 returns filed in 2026. It remains available for eligible overtime earned during the 2026 tax year and reported on returns filed in 2027.
What Counts as Qualified Overtime?
Only the overtime premium qualifies.
Time-and-a-Half Overtime
For overtime paid at 1.5 times your regular pay rate:
- Regular pay = 1.0×
- Overtime premium = 0.5×
- Only the 0.5× premium portion qualifies for the deduction
Example
- Regular rate: $20 per hour
- Overtime rate: $30 per hour
- Premium portion: $10 per hour
The $10 premium portion is the deductible amount.
Double-Time Overtime
For overtime paid at 2 times the regular rate:
- Regular pay = 1.0×
- Additional overtime amount = 1.0×
- IRS rules allow only one-half of the extra overtime amount to be treated as qualified overtime compensation
As a result, only part of the double-time premium may qualify.
Maximum Deduction Amounts
The deduction is capped each year.
| Filing Status | Maximum Deduction |
|---|---|
| Single and other non-joint filers | $12,500 |
| Married Filing Jointly | $25,000 |
If your calculated deduction exceeds the limit, use the applicable maximum amount. [
How to Calculate the Deduction
Time-and-a-Half Formula
For most hourly employees receiving time-and-a-half overtime:
Deduction = Total Overtime Pay ÷ 3
This works because one-third of time-and-a-half pay represents the premium portion.
Example
- Total overtime pay: $15,000
- Deduction: $15,000 ÷ 3 = $5,000
Double-Time Formula
For double-time overtime:
Deduction = Total Overtime Pay ÷ 4
Example
- Total overtime pay: $20,000
- Deduction: $20,000 ÷ 4 = $5,000
After calculating the premium portion, compare the result to the annual deduction limit and use the lower amount.
Examples
Andrew
- Overtime type: Time-and-a-half
- Total overtime pay: $15,000
- Deduction: $15,000 ÷ 3 = $5,000
Brad
- Overtime type: Double-time
- Total overtime pay: $20,000
- Deduction: $20,000 ÷ 4 = $5,000
Maria
- Overtime type: Time-and-a-half
- Total overtime pay: $40,000
- Calculated deduction: Approximately $13,333
- Allowed deduction: $12,500 maximum limit
How to Enter the Deduction in the Program
Tax Year 2026 and Later
The program automatically calculates the deduction using qualified overtime amounts reported on:
- Form W-2, Box 12, Code TT
- Form 1099-MISC box 14
- Form 1099-NEC box 1d
Beginning with tax year 2026, separate reporting requirements make automatic calculation possible for many taxpayers.
Tax Year 2025 Returns
For 2025 returns, users must calculate the overtime premium and manually enter the deduction amount.
Path:
Federal → Deductions → Additional Deductions → No Tax on Overtime
Enter only the calculated overtime premium amount.
Do not enter:
- Total W-2 wages
- Full overtime earnings
- Full 1099 income amounts
Only the qualified overtime premium should be entered.
Married Filing Jointly Returns
If both spouses earned qualified overtime:
- Calculate each spouse's eligible overtime premium separately.
- Combine the qualified amounts.
- Do not exceed the $25,000 maximum deduction limit.
W-2 Reporting Requirements
Qualified overtime compensation is included in your taxable wages.
Do not use your Form W-2 Box 1 wages when calculating this deduction.
Only the separately identified qualified overtime amount should be used for the deduction calculation. For tax year 2026 and later, employers generally must report qualified overtime compensation separately to support the deduction claim.
1099-NEC and 1099-MISC Reporting
If you receive qualified overtime reported on Form 1099-NEC or Form 1099-MISC:
- Do not enter the entire income amount.
- Use only the overtime premium portion eligible for the deduction.
If you have overtime income from both W-2 and 1099 forms, calculate each separately and combine only the qualified premium amounts.
Will This Increase My Take-Home Pay?
Possibly.
For 2025, the deduction generally affected taxpayers only when they filed their tax return.
Beginning in later years, withholding procedures may allow some employees to see a modest increase in take-home pay during the year, depending on employer payroll reporting and IRS withholding guidance.
Key Takeaway
The No Tax on Overtime deduction does not eliminate taxes on all overtime earnings. Instead, it allows eligible taxpayers to deduct the qualified overtime premium portion of their pay, subject to income limits and annual caps. For most time-and-a-half overtime, the deductible amount is roughly one-third of total overtime pay, up to $12,500 ($25,000 for Married Filing Jointly).