No Tax on Overtime Calculator
Estimate your No Tax on Overtime deduction for tax years 2025-2028, created by the OBBB Act. Workers can deduct up to $12,500 of qualifying overtime premium ($25,000 on a joint return) from federal taxable income, but FICA still applies.
⚠️ Important: This deduction reduces FEDERAL INCOME TAX only. Social Security (6.2%) and Medicare (1.45%) are still withheld on all overtime pay. State income tax also typically still applies.
Reviewed & updated for 2026 by Rakesh Choudhary, PhDMethodology & sources · How we calculate
When does No Tax on Overtime start?
It has already started. The deduction covers qualifying overtime paid to you in 2025, 2026, 2027 and 2028: tax years beginning after December 31, 2024, and before January 1, 2029. You do not need to opt in at work. You claim it when you file your federal return, year by year:
| Overtime paid in | Claimed on | Filed in |
|---|---|---|
| 2025 | 2025 Form 1040, Schedule 1-A Part III | 2026 |
| 2026 | 2026 Form 1040, Schedule 1-A Part III | 2027 |
| 2027 | 2027 Form 1040, Schedule 1-A Part III | 2028 |
| 2028 | 2028 Form 1040, Schedule 1-A Part III | 2029 |
You do not have to wait for the refund: from 2026 the Form W-4 lets you count expected overtime premium so less is withheld from each paycheck (see the W-4 section below). Overtime paid from January 1, 2029 is back to ordinary taxation unless Congress acts first.
How No Tax on Overtime works
Created by the One Big Beautiful Bill Act (OBBB) of 2025, this deduction:
- Deducts up to $12,500 of qualifying overtime premium ($25,000 on a joint return) from federal taxable income per year, without itemizing
- Effective for tax years 2025 through 2028
- Applies only to overtime the federal FLSA requires, and only to its premium (the half of time-and-a-half)
- Phases out for high earners: $100 less for each $1,000 of modified AGI above $150,000 ($300,000 joint)
- Reduces FEDERAL INCOME TAX only, FICA (Social Security + Medicare) still applies
- State income tax follows state-by-state rules, most still tax overtime
Tax savings at common scenarios
| Qualifying premium | 12% bracket | 22% bracket | 24% bracket | 32% bracket |
|---|---|---|---|---|
| $2,500 | $300 | $550 | $600 | $800 |
| $5,000 | $600 | $1,100 | $1,200 | $1,600 |
| $7,500 | $900 | $1,650 | $1,800 | $2,400 |
| $10,000 | $1,200 | $2,200 | $2,400 | $3,200 |
| $12,500 (cap) | $1,500 | $2,750 | $3,000 | $4,000 |
| $25,000 (joint cap) | $3,000 | $5,500 | $6,000 | $8,000 |
Federal income tax saved at each marginal rate, with income under the phase-out. The premium is the half of time-and-a-half, not your whole overtime pay; $12,500 is the cap on a single return, and $25,000 applies only on a joint one. FICA (7.65%) is still owed on all OT pay, and state income tax may still apply.
What "qualifying overtime" actually means
The OBBB deduction sounds simple — deduct up to $12,500 of OT from your taxable income — but the definition of qualifying overtime is narrower than most workers assume. The IRS only counts pay that meets all three tests:
- The overtime is required by the federal FLSA. Federal time-and-a-half over 40 hours per week is the baseline. Overtime required only by state law, such as California's daily overtime past 8 hours, does not count, and neither do voluntary holiday pay, shift differentials, or on-call premiums.
- Only the premium portion counts. If you earn $20/hour regular and $30/hour for an OT hour, only the $10 premium above your regular rate is deductible — not the full $30. This is one of the biggest sources of taxpayer confusion. Your "qualifying overtime" is roughly one-third of your gross OT pay, not the full amount.
- You must be non-exempt under FLSA. Salaried managers, professionals, and outside sales workers don't qualify, even if their employer voluntarily pays them OT. The deduction is targeted at hourly workers and other non-exempt employees.
Worked example. An RN earns $35/hour regular and works 50 hours one week. OT premium = 10 hours × ($35 × 0.5) = $175. That $175 is the "qualifying overtime" amount that counts toward the $12,500 cap ($25,000 joint), not the gross OT pay of $525 (10 hours × $52.50). At 50 weeks of this pattern, qualifying OT totals $8,750 — well under the cap but a meaningful federal tax deduction.
The calculator above works the same way: it takes half your regular rate for each overtime hour, then applies the cap and the income limit exactly as Schedule 1-A (Form 1040) Part III does. When you file, use the amount your employer reports, or for 2025 one of the methods in IRS Notice 2025-69.
Updating your W-4 to capture the deduction during the year
By default, your employer withholds federal tax on overtime as if it's ordinary income. You'll still get the deduction at tax-filing time — as a refund — but the IRS held your money interest-free for up to 16 months. Most workers prefer the cash flow that comes from adjusting withholding.
The 2026 Form W-4 includes a line for it in the Step 4(b) Deductions Worksheet (line 1b). Three options for managing it:
- Do nothing. Wait until tax time, claim the deduction on your return, get a refund. Simplest approach. Best for workers who don't reliably get OT every paycheck or whose OT amounts vary widely.
- Use the W-4 Deductions Worksheet. Enter your estimated qualifying overtime premium on line 1b (up to $12,500, or $25,000 joint, if your total income is under $150,000, or $300,000 joint) and carry the worksheet total to Step 4(b). Your employer then withholds less on every paycheck.
- Use the IRS estimator. The W-4 points to the IRS Tax Withholding Estimator (irs.gov/W4App) for the most accurate result. With more than one job, fill in Steps 3 to 4(b) on only one Form W-4, ideally the highest-paying job's. There is no separate overtime-only form.
Be conservative when adjusting withholding. If you overestimate qualifying OT and end up owing tax at year-end, you may face an underpayment penalty. The safe-harbor rule: as long as you paid in at least 90% of your current year's tax or 100% of last year's (110% if AGI > $150K), no penalty applies.
FAQs
What is 'No Tax on Overtime'?
A 2025-2028 federal income tax deduction created by the One Big Beautiful Bill Act (OBBB), 26 U.S.C. 225. Workers can deduct the premium part of their required overtime pay, up to $12,500 a year ($25,000 on a joint return), whether or not they itemize. It reduces federal income tax, not Social Security and Medicare tax, and not state tax unless your state adopts it.
Who qualifies for No Tax on Overtime?
Workers who are: (1) non-exempt under the federal FLSA, so overtime is legally required for them; (2) paid that overtime, of which only the premium above the regular rate counts; (3) holding a valid Social Security number, and filing jointly if married. The deduction shrinks by $100 for each $1,000 of modified AGI over $150,000 ($300,000 joint). For 2025, employers weren't required to report the amount separately, so the IRS lets you work it out from pay stubs (Notice 2025-69). Exempt employees (salaried managers, professionals) don't qualify.
Is FICA still owed on overtime?
Yes. No Tax on Overtime only exempts FEDERAL INCOME TAX. FICA (Social Security 6.2% + Medicare 1.45%) is still owed on all wages including overtime. State income tax also still applies in most states (some may opt to follow federal rules).
How does this work on my paycheck?
Your employer withholds as usual unless you tell it otherwise. The 2026 Form W-4 has a line for it in the Step 4(b) Deductions Worksheet (line 1b): an estimate of your qualified overtime, the "and-a-half" part, up to $12,500 ($25,000 joint). If you don't update your W-4, you get the deduction when you file, usually as a bigger refund.
Is the limit per year or per check?
Per tax year, however many paychecks: up to $12,500 on a single or head-of-household return, and $25,000 in total on a joint return, however it splits between the spouses. Married people filing separately can't claim it.
Does the deduction apply to all overtime?
Only overtime that the federal FLSA requires counts, and only its premium: the half of time-and-a-half. Overtime required only by state law, such as California's daily overtime past 8 hours, doesn't count, and neither does pay above 1.5x beyond that half. Holiday pay premiums, shift differentials, and on-call pay are NOT qualifying overtime.
When does the No Tax on Overtime deduction end?
Tax years 2025 through 2028 (four years). Unless extended by Congress, the deduction sunsets at the end of 2028. Workers should maximize OT during these years if the financial trade-off makes sense for their situation.