No Tax on Overtime: Who Qualifies and How Much You Save on Your 2026 Return

No tax on overtime is a federal income tax deduction of up to $12,500 a year ($25,000 for married couples filing jointly) for the extra “half” of time-and-a-half pay. It runs for tax years 2025 through 2028, so you can claim it on the 2026 return you file in early 2027.

The name oversells it. Your overtime is still taxed on every paycheck, Social Security and Medicare taxes still apply, and only part of your overtime pay counts. This guide explains who qualifies, how to work out your own deduction, and the new 2026 rule that ties the deduction to a single box on your W-2.

Key Takeaways

• You can deduct only the overtime premium the Fair Labor Standards Act requires: the “half” in time-and-a-half, not your whole overtime check.
• The deduction is capped at $12,500 per return, or $25,000 on a joint return, and shrinks by $100 for every $1,000 of income over $150,000 ($300,000 joint).
• Starting with 2026, you can deduct only the amount your employer reports in box 12 of your W-2 with code TT. If it is missing or too low, you need a corrected W-2c.
• Salaried exempt workers, railroad and airline workers, and most independent contractors do not qualify. Married couples must file jointly.
• It lowers federal income tax only. Social Security and Medicare taxes still apply to all of your overtime, and many states still tax it.

What is no tax on overtime?

No tax on overtime is a deduction created by the One Big Beautiful Bill Act (Public Law 119-21), signed July 4, 2025. Eligible workers can deduct the overtime premium they earn, up to $12,500 a year, from their federal taxable income for tax years 2025 through 2028. You claim it on Schedule 1-A of Form 1040.

It is a deduction, not an exclusion. The IRS says plainly that overtime is not exempt from gross income, and it is still subject to income tax withholding, Social Security and Medicare taxes, per IRS Fact Sheet FS-2026-13. You get the benefit when you file your return, as a smaller tax bill or a bigger refund.

You can take the deduction whether you itemize or use the standard deduction. The law adds a new section 225 to the tax code, and it expires after December 31, 2028 unless Congress extends it.

Who qualifies for no tax on overtime?

You qualify if you are a non-exempt employee who earns overtime required by section 7 of the Fair Labor Standards Act (FLSA), have a Social Security number valid for work, and file jointly if you are married. Most hourly workers paid time-and-a-half for hours over 40 a week fit this description.

Here is the IRS checklist, from its no tax on overtime page and fact sheet:

• FLSA overtime. You are eligible for overtime under the FLSA, and your employer paid you overtime it required.
• A valid SSN. Your Social Security number must be valid for employment and issued before your return’s due date, including extensions.
• Joint return if married. Married couples must file jointly. Filing separately rules out the deduction.
• Income under the phase-out. Above $150,000 of modified adjusted gross income ($300,000 joint), the deduction gets smaller.

Common examples are hourly workers in factories, warehouses, construction, retail, hospitals and restaurants.

Hospital and nursing home staff paid under the FLSA’s 8-and-80 system can also qualify, as can public-agency police officers and firefighters paid FLSA overtime under their work-period rules. Government workers who take comp time count it only when it is paid out.

Who does not qualify?

Workers who are exempt from FLSA overtime do not qualify, even if their employer or union contract pays them overtime anyway. That includes most salaried executive, administrative and professional employees, teachers, outside sales staff, and employees of railroads and air carriers.

The IRS fact sheet lists these FLSA-exempt groups, among others:

• Executive, administrative and professional employees, including teachers, and certain computer workers
• Outside sales employees and certain retail employees paid mostly on commission
• Employees of railroads and air carriers, taxi drivers, seamen on American vessels, and certain truck drivers
• Seasonal amusement and recreation workers and certain farm workers
• Employees who own at least 20% of the business and actively manage it

Independent contractors usually do not qualify, because the FLSA’s overtime rules cover employees. The IRS says the deduction shows up on a Form 1099 only in rare cases where a worker is an employee under the FLSA but treated as a contractor for tax purposes.

A union contract cannot make an exempt worker eligible. The IRS says a worker who is ineligible for FLSA overtime gets no qualified overtime, “regardless of other laws or circumstances (such as a collective bargaining agreement) providing for overtime pay.”

What counts as qualified overtime?

Only the premium part of FLSA overtime counts. For most workers, the IRS formula is: hours worked over 40 in a workweek, times one-half, times your regular rate of pay. If you earn $20 an hour and work 10 hours of overtime, your overtime pay is $300, but only $100 of it counts toward the deduction.

The other two-thirds of time-and-a-half pay is your regular wage for those hours, and it stays fully taxable. A quick check: if all your overtime was paid at time-and-a-half, your qualified amount is one-third of your total overtime pay.

Type of overtime pay	Counts toward the deduction?
Time-and-a-half for hours over 40 in a week	Yes, the half-time premium only
Double time for hours over 40	Only the half the FLSA requires. $20 an hour, 10 hours at double time: $400 paid, $100 counts
Daily overtime under state law (for example, over 8 hours in a day)	Only to the extent the hours also exceed 40 in the week under the FLSA
Weekend, holiday or union contract premiums	Only the amount the FLSA itself requires
Overtime paid to an FLSA-exempt salaried worker	No
Tips	No (tips have their own separate deduction)

Source: IRS Fact Sheet FS-2026-13, questions 12 and 16.

Your regular rate is not always your base hourly wage. Under the FLSA, it includes most pay for the week, such as shift differentials and nondiscretionary bonuses, divided by the hours you worked. Your employer does this math and reports the result on your W-2.

How much will you save?

Your savings equal your deduction times the tax rate on your top dollars of income. A single filer in the 12% bracket who deducts $5,000 of overtime premium saves about $600. In the 22% bracket, the same deduction saves about $1,100. By our math, a single filer at the $12,500 cap saves about $2,750 in the 22% bracket.

Here is a full example using the 2026 tax brackets and the $16,100 standard deduction for single filers, from the IRS 2026 inflation adjustments. These are our own calculations, for federal income tax only.

• A single worker earns $25 an hour and works 40 hours a week all year: $52,000.
• They also work 10 hours of overtime a week for 50 weeks at $37.50 an hour: $18,750 of overtime pay. Total wages: $70,750.
• The qualified premium is 10 hours times $12.50, times 50 weeks: $6,250. That is one-third of the $18,750.
• Taxable income falls from $54,650 to $48,400. Because the deduction pushes part of their income from the 22% bracket down into the 12% bracket, they save about $1,175.

2026 brackets that matter for overtime workers

Rate	Single: taxable income over	Married filing jointly: over
10%	$0	$0
12%	$12,400	$24,800
22%	$50,400	$100,800
24%	$105,700	$211,400

Source: IRS: tax year 2026 inflation adjustments (Rev. Proc. 2025-32). Standard deduction: $16,100 single, $24,150 head of household, $32,200 joint.

Workers who owe little or no income tax after credits save less, because the deduction only lowers income tax. It does not raise refundable credits such as the earned income tax credit, which works on separate income rules.

Income limits and the phase-out

The full deduction is available if your modified adjusted gross income (MAGI) is $150,000 or less, or $300,000 or less on a joint return. Above that, the deduction drops by $100 for each $1,000 of MAGI over the limit. A maximum $12,500 deduction is gone at $275,000 of MAGI for a single filer.

The rule comes from section 225(b) of the tax code. Schedule 1-A tells you to divide your excess income by $1,000 and round down to a whole number before multiplying by $100.

Example: a single filer has $10,000 of qualified overtime and MAGI of $170,000. The excess is $20,000, so the deduction drops by 20 times $100, or $2,000. They can deduct $8,000. For a joint return claiming the full $25,000, the deduction is gone at $550,000 of MAGI. Those end points are our math from the IRS formula.

The 2026 rule: your W-2 must show it

For tax year 2026 and later, you can deduct only the qualified overtime your employer reports on your Form W-2, in box 12 with code TT. If your employer leaves it off or reports too little, ask for a corrected Form W-2c. The IRS says you cannot estimate the amount yourself or use a substitute Form 4852.

This is a big change from 2025. For 2025, employers did not have to report overtime separately, and the IRS let workers figure it from pay stubs. For 2026 on, the IRS says “no relief is available,” and workers may not count any amount above what box 12, code TT shows, per question 20 of FS-2026-13.

Code TT shows the full qualified amount, even if it is above the $12,500 cap. The cap and the phase-out are applied later, on Schedule 1-A. If the W-2 overstates the amount, the IRS says you can count only what you were actually paid.

What to do now: check that your pay stubs track overtime hours. When your 2026 W-2 arrives in early 2027, look for code TT in box 12 before you file. If you worked overtime and it is missing, contact your payroll office right away.

How to claim the deduction on your 2026 return

1. Get your W-2 and find box 12, code TT. If you had more than one job, collect every W-2 that shows the code.
2. Fill out Schedule 1-A, Part III, “No Tax on Overtime.” List the code TT amount from each employer, along with each employer’s EIN, according to the 2026 draft of Schedule 1-A.
3. Apply the cap and the phase-out. The form limits you to $12,500 ($25,000 joint) and reduces the amount if your MAGI is over $150,000 ($300,000 joint).
4. Carry the result to Form 1040. The last line of Part III is your deduction. Tax software asks for the code TT amount and does the math.

The 2026 Schedule 1-A is still a draft, so line numbers may change before filing season. The same form holds the other new deductions, such as no tax on tips and the deduction for people 65 and older.

If you cannot afford a tax preparer, IRS Free File offers free guided tax software to filers under an income limit, and the VITA program has volunteers prepare returns for free for people with low to moderate incomes.

Will my paycheck change?

Not on its own. Your employer keeps withholding federal income tax on your overtime as usual. To have less withheld during the year, you can give your employer a new Form W-4 and enter the expected deduction in step 4(b). Otherwise, you get the savings when you file.

The IRS says an employer may not reduce withholding for this deduction unless you furnish an updated Form W-4, and the 2026 W-4 was updated to allow it in step 4(b). Be careful not to overestimate: if you work less overtime than expected, you could owe at tax time.

Social Security and Medicare taxes, 7.65% of your pay for most employees, still come out of every overtime dollar. Those taxes are not affected by this deduction at all.

More overtime can also change your eligibility for income-based help. SNAP, for example, counts your gross wages, including overtime, against the SNAP income limits. See how SNAP figures your benefit if you get food assistance.

The deduction also does not lower your adjusted gross income, because it is taken after AGI on Form 1040. Medicaid looks at income built on AGI, so overtime still counts toward the Medicaid income limits. Cash aid has its own rules, too; see TANF income limits.

Does no tax on overtime apply to state taxes?

Not automatically. The deduction is federal. Each state decides whether its own income tax follows it, so in many states your overtime is still fully taxed on your state return. Check your state revenue department’s page before you file.

Two states show how different the rules can be. Colorado requires residents to add the full federal overtime deduction back to their state income for tax years 2026 and later. Alabama created its own deduction for the overtime premium, capped at $1,000 per taxpayer, for 2026 through 2028.

States with no wage income tax, such as Texas, Florida and Washington, have nothing to add back. Other states have passed or are still considering their own rules, so look up your state before you file.

If you have not filed for 2025 yet

The deduction also applies to 2025. Because most 2025 W-2s did not separate overtime, the IRS let workers use reasonable methods. If your pay stubs show total overtime paid at time-and-a-half, you can count one-third of it. If you were paid double time, you can count one-fourth.

The IRS gives an example: a worker paid $15,000 of time-and-a-half overtime in 2025 can include $5,000, per IRS Notice 2025-69 guidance. If you already filed for 2025 and missed the deduction, you can file an amended return on Form 1040-X.

Next steps

If you earn hourly overtime, check your pay stubs now, and look for code TT in box 12 of your 2026 W-2 when it arrives. Decide whether a new W-4 makes sense, and check your state’s rules before you file. Our guide for low-income families lists other programs working households can use.

If your income is modest, you may also qualify for the earned income tax credit (see our EITC program guide), which can be worth more than the overtime deduction for many families.