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.
- Starting with 2026 income (filed 2027), employers report your overtime premium in W-2 Box 12 code 'TT' - the finalized 2026 W-2 instructions no longer offer the transition relief available for 2025.
- The deduction expires after the 2028 tax year unless Congress extends it.
- If you work in California (or another state with daily-overtime rules) and your pay stub shows 'overtime' for a long single shift without your weekly total crossing 40 hours, that overtime is state-mandated, not FLSA-mandated - and it does not qualify for this federal deduction.
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 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.
State Daily Overtime vs. Federal Weekly Overtime — A Distinction That Trips Up a Lot of People
This one catches a lot of shift workers off guard, especially nurses and other healthcare staff on 12-hour shifts, and anyone in California, Alaska, Nevada, or Colorado — states with their own daily-overtime rules. The federal deduction only covers FLSA-mandated overtime, which is based on working more than 40 hours in a week. It does not cover overtime that exists only because of a state daily-overtime law.
Example — Maria, ICU Nurse in California:
Maria works three 12-hour shifts a week — 36 total hours. California requires overtime pay for any hours worked beyond 8 in a single day, so her pay stub shows 4 hours of “overtime” per shift, 12 hours total every week.
But Maria never crosses 40 hours for the week. None of that overtime is FLSA-mandated, so none of it qualifies for the federal No Tax on Overtime deduction — even though her pay stub calls it overtime, and even though California taxes it as ordinary income (California hasn’t conformed to the federal deduction either).
If Maria picked up a fourth shift in the same week, pushing her to 48 total hours, the premium on the hours beyond 40 would be FLSA overtime and would qualify.
The quick check: look at your total hours for the week, not your daily schedule. If you didn’t cross 40 hours, any “overtime” on your pay stub is very likely state-mandated daily overtime, not FLSA overtime — and it won’t qualify for this deduction, regardless of what the pay stub label says.
This is easy to miss because most pay stubs don’t distinguish between the two kinds of overtime; they just say “overtime” either way. If you’re not sure which one you’re getting, ask your payroll department whether your overtime hours came from crossing 40 hours for the week or from a daily/shift-based state rule.
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 — at least for 2025 income. 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
This depends on which tax year you’re filing.
For 2025 income (filed 2026): 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
For 2026 income (filed 2027): This gets easier. The finalized 2026 Form W-2 instructions — published by the IRS in January 2026 — require employers to separately calculate and report your qualified overtime premium in W-2 Box 12 using code “TT.” Unlike 2025 (where Notice 2025-62 and Notice 2025-69 gave employers and employees transition relief and self-calculation guidance), that relief does not carry over to 2026: employers are expected to have the tracking and reporting fully in place. Code TT reports only the premium portion — the extra half, not your entire overtime paycheck — so it should match the number you’d otherwise calculate by hand.
Keep your pay stubs either way. If the IRS questions your Schedule 1-A, you need to show how the premium figure was arrived at, even once it’s employer-reported.
How to Claim on Schedule 1-A
Step 1: Calculate your total overtime premium as described above (or pull it from W-2 Box 12 code TT starting with 2026 income).
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 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. For 2025 income, overtime premium isn’t on your W-2, so pay stubs are your only documentation. Even once employers start reporting Box 12 code TT for 2026 income, hang onto your pay stubs as backup — a lost pay stub means a hard conversation with the IRS if you’re questioned.
Fourth, and this one catches a lot of shift workers: assuming every hour labeled “overtime” on your pay stub qualifies. If you work 12-hour shifts in a state with daily-overtime rules — California is the most common example — you can see overtime pay every single week without ever crossing 40 hours total. That state-mandated overtime doesn’t qualify for the federal deduction; only overtime from crossing 40 hours in a week does. See the section above for the full breakdown.
Looking Ahead: 2027 and 2028
The deduction runs through the 2028 tax year. For 2026 income (filed in 2027), the guidance I was watching for last year is now settled: the IRS finalized the 2026 Form W-2 instructions in January 2026, and Box 12 code “TT” is mandatory for employers reporting qualified overtime premium. That should meaningfully cut the documentation burden for most workers going forward. Like the tips deduction’s $25,000 cap, the $12,500/$25,000 overtime caps and the $150,000/$300,000 phase-out thresholds are fixed by statute — they are not indexed to inflation.
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.
Also earning tips? See: No Tax on Tips — Who Qualifies, Income Limits, and Real Examples — the sister deduction for tip income, also on Schedule 1-A.
