No Tax on Overtime Explained: Who Qualifies and How Much You Save

What counts as qualified overtime

Qualified overtime compensation is overtime pay required by section 7 of the FLSA that exceeds your regular rate. In practice, that is the extra half-rate you earn for hours over 40 in a workweek as a non-exempt employee. If you earn $30 an hour and get $45 for overtime hours, only $15 per overtime hour qualifies. Your base $30 for those hours is taxed normally.

• Exempt salaried employees who are not entitled to FLSA overtime do not have qualified overtime, even if their employer pays them extra for long weeks.
• Overtime required only by state law (such as daily overtime after 8 hours) or by a union contract does not count unless the FLSA also requires it.
• If your employer pays double time, only the FLSA-required half-time premium counts. IRS guidance gives the example of $20,000 of double-time pay producing $5,000 of qualified overtime ($20,000 divided by 4).
• You need a Social Security number valid for employment, and married couples must file jointly.

Limits and phaseout

The maximum is reduced by $100 for each $1,000 of modified AGI above the threshold. A single filer with $180,000 of MAGI loses $3,000 of the cap (30 x $100), so the most they can deduct is $9,500. The deduction applies only for tax years 2025, 2026, 2027 and 2028 unless Congress extends it.

Worked examples

Example 1, single: Alex earns $30 an hour ($62,400 base) and works 300 overtime hours at $45, for $13,500 of overtime pay and $75,900 total wages in 2026. Qualified overtime is the premium: 300 x $15 = $4,500 (equivalently $13,500 / 3). Without the deduction, taxable income is $59,800 and federal income tax is $7,868. With it, taxable income is $55,300 and tax is $6,878. Savings: $990, which is $4,500 x Alex's 22% marginal rate.

Example 2, married filing jointly: two hospital workers have $14,000 of combined FLSA overtime premium and $160,000 of MAGI. They are under the $25,000 cap and the $300,000 threshold, so they deduct all $14,000. At their 22% bracket, that saves about $3,080.

Example 3, high overtime: a single lineworker has $45,000 of overtime premium and $140,000 of MAGI. The deduction is capped at $12,500, saving $3,000 at a 24% marginal rate.

How to claim the overtime deduction

You claim it on Schedule 1-A of Form 1040, and you do not need to itemize. It reduces taxable income, not adjusted gross income. For 2025, employers were not required to report qualified overtime separately, so the IRS allowed reasonable methods: use an amount your employer provided (for example in W-2 box 14 or a separate statement), or figure the premium from pay stubs. If you know only total overtime pay at time-and-a-half, dividing by 3 gives the premium. Keep the records you used.

For 2026 and later, employers must report qualified overtime on Form W-2, box 12, code TT (Form 1099-NEC box 1d or 1099-MISC box 14 for non-employees). You can also lower your paycheck withholding now by entering estimated qualified overtime on line 1b of the 2026 Form W-4 Deductions Worksheet.

What the deduction does not do

• It does not remove Social Security (6.2%) or Medicare (1.45%) tax from overtime.
• It does not change how much your employer withholds unless you update your W-4.
• It does not automatically apply to state income tax; each state decides whether to conform.
• It does not reduce AGI, so it does not help with AGI-based limits such as the medical expense floor.

Common overtime scenarios

Public safety employees and other groups covered by special FLSA overtime rules (such as section 7(k) work periods for police and firefighters) can qualify for the FLSA-required premium. The IRS guidance on 2025 overtime includes methods for these cases. If your employer reports an amount in W-2 box 12 code TT, use that figure for 2026.