Is There Tax on Overtime? 2026 Rules (OBBB Update)

Yes, there is tax on overtime, but with a major exception starting in 2025. The One Big Beautiful Bill Act (OBBB) created a “No Tax on Overtime” deduction: for tax years 2025-2028, workers can deduct the premium part of their required overtime pay, up to $12,500 a year ($25,000 on a joint return), from federal taxable income (26 U.S.C. 225).

This doesn’t mean overtime is tax-free. Only the “half” of time-and-a-half counts, and only federal income tax goes down. Here’s exactly what’s taxed and what isn’t.

What “No Tax on Overtime” actually covers

For tax years 2025 through 2028 only, you can deduct:

✅ The overtime premium (the pay above your regular rate), up to $12,500 a year, or $25,000 on a joint return

✅ From federal taxable income only, whether or not you itemize

The deduction shrinks by $100 for each $1,000 of modified AGI above $150,000 ($300,000 joint). That’s it. Everything else still applies.

What’s still taxed on overtime

❌ Social Security tax (6.2% on all wages including OT, up to $184,500 in 2026) ❌ Medicare tax (1.45% on all wages including OT, no cap) ❌ Additional Medicare (0.9% on wages over $200K single) ❌ State income tax (varies by state, most still tax OT) ❌ City/local income tax (in jurisdictions that have it) ❌ Federal income tax on the straight-time part of your overtime pay, and on any premium above the cap

So if you earn $30,000 of overtime pay at time-and-a-half:

• $10,000 of it is premium (a third), and all $10,000 is deductible, under the $12,500 cap, if your income is under $150,000
• $20,000 is taxed normally for federal income tax
• All $30,000 is subject to Social Security, Medicare, and state tax

What counts as “qualifying overtime”?

The deduction covers overtime that section 7 of the federal Fair Labor Standards Act requires, and only the part above your regular rate. For time-and-a-half, that’s the “half”: a third of your overtime pay.

Qualifies (the premium part only):

• Hours over 40 per workweek (federal FLSA)
• FLSA overtime for police and firefighters on section 7(k) work periods

Does NOT qualify:

• Overtime owed only under state law, such as California’s daily overtime past 8 hours in a week under 40 hours
• Pay above time-and-a-half, such as double time, beyond the FLSA’s half
• Holiday pay premiums (1.5x for working a holiday)
• Shift differentials (extra pay for night shifts)
• On-call pay
• Special assignment pay
• Bonus and incentive pay
• Commissions
• Exempt salaried employees’ “extra hours” (you don’t get OT to begin with)

Who’s eligible

• Workers whose overtime FLSA section 7 required: non-exempt employees, and the IRS also allows other workers not treated as employees if the FLSA required their overtime
• A valid Social Security number on the return
• Married couples must file jointly
• Full deduction up to $150,000 of modified AGI ($300,000 joint), then $100 less for each $1,000 above

Not eligible:

• Exempt salaried employees (managers, professionals, certain admin), you don’t get OT to begin with
• True independent contractors, whom the FLSA’s overtime rule doesn’t cover
• Married people filing separately
• Anyone whose income has phased the deduction out: $275,000 of modified AGI for the full $12,500 single deduction, $550,000 for $25,000 joint

How it actually works on your paycheck

Two ways the deduction reaches you:

Option 1: Update your W-4

• The 2026 Form W-4 has a Deductions Worksheet line (1b) for your estimated qualifying overtime premium
• The worksheet total goes in Step 4(b), and your employer withholds less on every paycheck
• There is no separate overtime-only W-4

Option 2: Claim it when you file

• If you don’t update your W-4, you still get the deduction on Schedule 1-A of Form 1040
• You’ll owe less federal tax (or get a bigger refund) at year-end
• Slower but works retroactively

Tax savings examples

Example 1: Manufacturing worker, $25/hr, 10 hours OT/week year-round

• Annual gross OT pay: $25 × 1.5 × 10 × 52 = $19,500
• Qualifying premium: $12.50 × 10 × 52 = $6,500 (under the $12,500 cap)
• Tax bracket: 22% (single filer earning ~$80K total)
• Federal tax saved: $6,500 × 22% = $1,430
• FICA on OT (still owed): $19,500 × 7.65% = $1,492

Example 2: Nurse, $40/hr, 20 hours OT/week

• Annual gross OT: $40 × 1.5 × 20 × 52 = $62,400
• Qualifying premium: $20 × 20 × 52 = $20,800 (over the single cap)
• Deduction: $12,500 (total pay of $145,600 is under the $150,000 income limit)
• Federal tax saved (at 24% bracket): $12,500 × 24% = $3,000
• OT pay still taxed at 24%: $62,400 − $12,500 = $49,900
• FICA on full OT: $62,400 × 7.65% = $4,774
• If other income raised modified AGI to $165,500, the deduction would drop by $1,500 (15 whole thousands over $150,000, at $100 each) to $11,000

State law variations

Each state decides for itself. The federal deduction comes after adjusted gross income (Form 1040 line 13b, below AGI on line 11), and most states with an income tax start from federal AGI, so it doesn’t reach those state returns automatically.

States without a wage income tax don’t tax overtime pay at all. Everywhere else, check your state revenue department’s current instructions before assuming your state tax goes down.

How to maximize this deduction

1. Volunteer for OT shifts during 2025-2028, limited-time benefit
2. Check how your employer reports it: for 2026 wages, box 12 of your W-2 with code TT
3. File 2025-2028 returns even if you usually skip filing, refund opportunity
4. Check your state’s rules: the federal deduction doesn’t flow into most state returns automatically
5. Update your W-4 if you want bigger paychecks now (vs refund later)

Common questions

Q: Will my employer automatically handle this? A: Your withholding changes only if you fill in the W-4’s Deductions Worksheet. Otherwise you claim the deduction when you file. Your employer’s part is reporting the amount: from 2026, in box 12 of your W-2 with code TT.

Q: What if my employer doesn’t track OT separately? A: For 2025, employers weren’t required to report it separately. The IRS let them use box 14 of the W-2 or a separate statement, and let workers work it out from pay stubs using the methods in Notice 2025-69. From 2026, the W-2 reports it in box 12 with code TT.

Q: Does this apply to gig workers / 1099? A: Usually not, because the FLSA’s overtime rule covers employees, not true independent contractors. The test is the FLSA requirement, not the tax form: if section 7 required the overtime, a worker not treated as an employee can claim it too.

Q: Is the cap per person or per family? A: Per return: $12,500, or $25,000 in total on a joint return, whichever spouse earned it. Married people filing separately can’t claim it.

Q: What if I work multiple jobs? A: The cap covers qualifying overtime from all your jobs combined.

Q: Will it last past 2028? A: Unknown. The provision sunsets at end of 2028 unless Congress extends. Plan to maximize during the window.

Pre-OBBB: How was overtime taxed before?

Before 2025, overtime was taxed exactly like regular wages:

• Federal income tax: progressive brackets (10-37%)
• FICA: 7.65% (Social Security + Medicare)
• State tax: where applicable

For 2025 through 2028, the premium part of FLSA overtime comes off federal taxable income; everything else is unchanged.

Related calculators

• No Tax on Overtime Calculator, Calculate your specific deduction
• Overtime Calculator, Calculate OT pay
• Time and a Half Calculator, Standard 1.5x rate
• Take-Home Pay Calculator, Paycheck after federal, state and FICA taxes

If you regularly earn overtime, the 2025-2028 window is a meaningful tax planning opportunity. Keep your pay stubs, and check the overtime figure your employer reports.