How the No Tax on Overtime deduction works
Created by the One Big Beautiful Bill Act as Internal Revenue Code §225, this deduction lets eligible workers deduct their qualified overtime premium for tax years 2025–2028. It is claimed on the new Schedule 1-A and is available whether or not you itemize.
Only the premium counts
This is the part most people get wrong. The deduction covers the premium portion only — the extra amount above your regular rate that the federal FLSA requires for overtime (the "half" in time-and-a-half). If you earned $900 in overtime pay at 1.5×, the premium is roughly $300 (one-third of the overtime pay), and that $300 is what's deductible — not the full $900.
The key numbers
| Rule | Amount | Status |
|---|---|---|
| Maximum deduction, single/HoH | $12,500 | Confirmed |
| Maximum deduction, married filing jointly | $25,000 | Confirmed |
| Phase-out begins (MAGI) | $150,000 single / $300,000 joint | Confirmed |
| Phase-out rate | −$100 per $1,000 over threshold | Confirmed |
| Deductible amount | Overtime premium only | Confirmed |
| Applies to tax years | 2025–2028 (then expires) | Confirmed |
Who qualifies
- You earn FLSA Section 7 overtime (federally required time-and-a-half). Overtime owed only under state law or a contract for an FLSA-exempt worker does not qualify.
- You have a valid Social Security number, and if married you file jointly.
- The amount is the premium reported by your employer (separately reported on your W-2 from tax year 2026).
Worked example
A warehouse worker files single, earns $48,000, and has a $4,000 overtime premium. They're below the phase-out, so the full $4,000 is deductible. In the 12% bracket that saves about $480 in federal income tax. Use the calculator for your exact numbers.
Frequently asked questions
How much overtime can I deduct in 2026?
Your qualified overtime premium up to $12,500 (single) or $25,000 (joint), for 2025–2028. Only the premium — the extra "half" of time-and-a-half — counts.
Is overtime really tax-free in 2026?
No. Only the premium is deductible from federal income tax, up to the cap. The pay still owes Social Security and Medicare, and the base portion isn't deductible.
What counts as the overtime premium?
The extra pay above your regular rate required by the FLSA. If you earned $900 of overtime at 1.5×, the premium is about $300.
Is there an income limit?
Yes — it phases out by $100 per $1,000 of modified AGI above $150,000 (single) or $300,000 (joint).
Can I claim tips and overtime both?
Yes, but the same dollar can't be both. See the No Tax on Tips calculator.
Methodology & sources
Savings = your eligible premium deduction × your 2026 marginal federal rate, computed from the official 2026 tax tables. Rules follow IRC §225 and IRS guidance.
- IRS — OBBBA deductions for working Americans
- One Big Beautiful Bill Act §70202 (IRC §225)
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Disclaimer: Educational estimate based on IRC §225 and IRS guidance as of June 2026; some details are still being finalized. Not tax advice. FedCalc is independent and not affiliated with the U.S. government or IRS.