Key Takeaways
- The OBBBA allows eligible workers to deduct the premium portion of overtime pay - the 'half' in time-and-a-half - from federal income tax for 2025-2028.
- Maximum deduction: $12,500 per individual ($25,000 for married filing jointly). Must file jointly if married.
- Only FLSA non-exempt workers qualify - most hourly employees and some salaried workers under the $684/week threshold. Salaried exempt employees generally do not qualify.
- Income phase-out starts at $150,000 MAGI (single) / $300,000 (joint). For every $1,000 over the threshold, the deduction drops by $100.
- You still owe Social Security and Medicare taxes on all overtime pay. This is a federal income tax deduction only.
- Claim it on Schedule 1-A, which attaches to Form 1040. Available whether you itemize or take the standard deduction.
- The deduction expires after the 2028 tax year unless Congress extends it.
If you regularly work overtime, there’s a number you need to know right now: $12,500. That’s the maximum amount of overtime premium pay you can deduct from your federal income tax for 2025 through 2028, thanks to the One Big Beautiful Bill Act (OBBBA).
For a nurse working regular double shifts at the 22% bracket, that’s up to $2,750 back on your tax return. For a manufacturing worker with significant overtime, it can be more. Here’s the complete breakdown — who qualifies, how the math works, and exactly how to claim it.
Part of our OBBBA Tax Guide series — all OBBBA provisions summarized in one place.
What Is the No Tax on Overtime Deduction?
The OBBBA introduced a federal income tax deduction for the premium portion of overtime pay earned from Fair Labor Standards Act (FLSA)-mandated overtime. “Premium” means the extra pay above your regular rate — the “half” in “time-and-a-half.”
If you earn $20/hour and receive $30/hour for overtime, the $10 premium per hour is what you deduct — not the full $30. You can deduct up to $12,500 of that premium per year as a single filer, or $25,000 combined on a joint return.
This is an above-the-line deduction on the new Schedule 1-A. You claim it whether you itemize or take the standard deduction.
Who Qualifies
Eligible workers:
- Hourly employees covered by FLSA overtime rules
- Non-exempt salaried employees earning below the FLSA salary threshold ($684/week or $35,568/year as of 2025)
- Some agricultural and domestic workers covered by state-equivalent overtime rules
Not eligible:
- Salaried exempt employees (most managers, executives, administrators, licensed professionals earning above the FLSA salary threshold)
- Self-employed and independent contractors (no employer to mandate FLSA overtime)
- Workers whose “overtime” is a voluntary bonus structure, not FLSA-mandated
- Employees in states or industries with overtime exemptions
The rule of thumb: if your employer is required by federal law to pay you overtime at 1.5x your regular rate, you’re likely eligible. If you’re salaried and overtime is discretionary, you likely aren’t.
Income Limits: The Phase-Out
The deduction reduces for higher earners:
| MAGI | Single Filer Deduction | Joint Filer Deduction |
|---|---|---|
| Under $150,000 | Up to $12,500 | Up to $25,000 |
| $155,000 | Up to $11,500 | Up to $25,000 |
| $162,500 | Full phase-out ($0) | Approaches $25,000 |
| Under $300,000 (joint) | N/A | Up to $25,000 |
For every $1,000 over the $150,000/$300,000 threshold, the maximum deduction drops by $100. The deduction reaches $0 at roughly $275,000 (single) or $550,000 (joint) assuming the full $12,500/$25,000 deduction.
Married filers must file jointly to claim this deduction. Filing separately disqualifies you entirely.
How to Calculate Your Premium Pay
This is where most workers need to do a little homework. Your W-2 shows total wages but doesn’t automatically break out the overtime premium. Here’s the formula:
Premium per hour = Overtime rate − Regular rate
Then: Total premium = Premium per hour × Number of overtime hours
Example: Emily, Registered Nurse
Emily earns $35/hour. Her overtime rate is $52.50 ($35 × 1.5). Her premium is $17.50 per hour.
In 2025, Emily worked 400 overtime hours: 400 × $17.50 = $7,000 in premium pay.
Her MAGI is $88,000 (well under $150,000). She deducts the full $7,000 on Schedule 1-A.
At the 22% bracket: $1,540 in federal tax savings.
Example: James, Manufacturing Supervisor
James earns $28/hour. Overtime rate: $42. Premium: $14/hour.
He worked 900 overtime hours in 2025: 900 × $14 = $12,600. But the deduction is capped at $12,500.
MAGI: $85,000 — full deduction.
At 22%: $2,750 in tax savings.
Example: Maria, Shift Manager (Phase-Out)
Maria earns $25/hour, worked 500 overtime hours. Premium: $12.50. Total premium: $6,250.
Her MAGI is $163,000 — $13,000 over the $150,000 threshold.
Phase-out reduction: 13 × $100 = $1,300.
Her available deduction: $6,250 − $1,300 = $4,950.
At 22%: $1,089 in tax savings — still meaningful.
Example: Robert, Salaried Exempt Project Manager
Robert earns $85,000/year salary. His company has “overtime” but it’s discretionary extra pay not mandated by FLSA — he’s a salaried exempt employee.
Robert does not qualify. His overtime pay doesn’t come from an FLSA mandate. This is one of the most common misconceptions I see.
What Documentation You Need
Unlike tips (which show up in W-2 Box 7), overtime premium isn’t broken out on your W-2. You’ll need to calculate it yourself:
- Year-end pay stub or employer statement showing total overtime hours and rates
- Your regular rate of pay (from your employment agreement or most recent pay stub)
- Calculation of premium hours × premium rate
Keep these records. If the IRS questions your Schedule 1-A, you need to show how you arrived at the premium figure.
For 2026 income (filed in 2027), the IRS may issue guidance on standardized overtime reporting on W-2 Box 14. Watch IRS.gov for updates — I’ll also post here when anything changes.
How to Claim on Schedule 1-A
Step 1: Calculate your total overtime premium as described above.
Step 2: Determine your MAGI and check whether you’re over the $150,000/$300,000 threshold.
Step 3: Open Schedule 1-A in your tax software (TurboTax, H&R Block, TaxAct all support this for 2025 returns). Enter your overtime premium in the overtime section.
Step 4: The software calculates any phase-out reduction and transfers the final deduction amount to Schedule 1, then to Form 1040.
For 2025 returns (filed in 2026), your tax software likely has a specific field for “qualified overtime premium compensation.” If you’re using a tax preparer, make sure they know you have FLSA overtime — not all preparers will ask unprompted.
Things can evolve quickly as IRS guidance updates. I’ll update this page — subscribe here to get notified.
Still Owe Payroll Taxes
One critical point: the overtime deduction reduces your federal income tax only. You still owe:
- Social Security tax: 6.2% on all wages including overtime
- Medicare tax: 1.45% on all wages including overtime
- State income tax (unless your state conforms to the OBBBA)
So Emily’s $7,000 overtime premium still generates about $534 in FICA taxes — but she saves $1,540 in federal income tax. Net benefit: roughly $1,000.
Common Mistakes to Watch Out For
The biggest one: deducting your full overtime pay, not just the premium. You can only deduct the extra pay above your regular rate. Deducting the full time-and-a-half amount overstates your deduction and could trigger an IRS notice.
Second: assuming salaried workers always qualify. “Overtime” for a salaried exempt employee is typically discretionary extra compensation, not FLSA-mandated overtime. The distinction matters — and most salaried workers earning a reasonable income are exempt.
Third: not keeping pay stubs. Since overtime premium isn’t on your W-2, your pay stubs are your only documentation. A lost pay stub means a hard conversation with the IRS if you’re questioned.
Looking Ahead: 2027 and 2028
The deduction runs through the 2028 tax year. For 2026 income (filed in 2027), I’m watching for IRS guidance on standardized W-2 reporting — if employers can include overtime premium amounts in Box 14 or a similar field, the documentation burden on workers drops significantly.
For 2028, this is worth planning around. If you have flexibility in when you take overtime (unusual, but possible for some roles), 2028 is the last year to maximize this deduction before it sunsets. A congressional extension is possible — these provisions poll very well — but nothing is guaranteed.
Related: 2026–2027 Federal Tax Brackets — knowing your bracket tells you exactly what each dollar of deduction saves. Also see: 2026–2027 IRS Refund Schedule for when to expect your refund if you’re filing with the overtime deduction.