Editor’s note: A plain-English summary of IRS guidance, not tax advice. Check the IRS pages linked below or a tax professional for your situation.
If you work overtime, you’ve probably heard that it’s now “tax-free.” That’s the headline version of a provision in the One Big Beautiful Bill Act. The real rule is more specific: you can deduct part of your overtime pay from your federal taxable income, and for many hourly workers, that part is smaller than they expect.
The rule in one paragraph
For tax years 2025 through 2028, the IRS says people who receive qualified overtime compensation may deduct “the pay that exceeds their regular rate of pay,” such as the “half” portion of “time-and-a-half”, when that overtime is required by the Fair Labor Standards Act (FLSA) and reported on a W-2, 1099 or other specified statement. The maximum deduction is $12,500 a year, or $25,000 if you file jointly, and it phases out above $150,000 of modified adjusted gross income ($300,000 joint).
Which part of your overtime counts
Under the FLSA, covered employees who aren’t exempt must get at least one and a half times their regular rate for hours over 40 in a workweek. That overtime pay has two parts:
| Part of overtime pay | Example at $24/hour | Deductible? |
|---|---|---|
| Straight-time part (1.0×) | $24 per overtime hour | No |
| Premium part (the extra 0.5×) | $12 per overtime hour | Yes, if required by the FLSA |
So if you earn $36 for an overtime hour, only $12 of it counts toward the deduction.
A worked example
Example
Luis is a warehouse lead in Houston earning $24 an hour. He works 50 hours most weeks, so he gets 10 overtime hours at $36 each: $360 of overtime pay a week. The deductible premium is $12 × 10 = $120 a week. Over 50 weeks, that’s $6,000, well under the $12,500 cap.
If that $6,000 would otherwise be taxed at 12%, the deduction lowers his federal income tax by about $720; at 22%, about $1,320. That’s helpful, but it’s not “no tax on $18,000 of overtime,” which is what some people assume. (Simplified example: the exact savings depend on his other income, deductions and bracket.)
Use our overtime pay calculator to see your own straight-time and premium amounts for a week. Multiply the premium by the weeks you usually work overtime to estimate the yearly figure.
How to estimate your deduction from a pay stub
- Find your regular hourly rate and the overtime hours on a typical pay stub.
- Multiply the regular rate by 0.5. That is the premium per overtime hour. At $22 an hour, it’s $11.
- Multiply the premium by your overtime hours for the pay period.
- Multiply by the number of pay periods you expect to work overtime this year.
- Compare with the cap: $12,500 if you file single, $25,000 if you file jointly.
If your pay stub shows overtime at “1.5×” as one line, divide the overtime dollars by 3 to get the premium part. ($360 of overtime at time-and-a-half includes $120 of premium.)
A second example: two earners
Example
Dana and Mike live in Indianapolis and file jointly. Dana is a nurse paid $40 an hour who averages 6 overtime hours a week for 48 weeks: a $20 premium × 6 × 48 = $5,760. Mike drives a delivery route at $28 an hour with 8 overtime hours a week for 50 weeks: $14 × 8 × 50 = $5,600. Together that’s $11,360, under their $25,000 joint cap, so the whole amount can be deducted if it is FLSA-required overtime and properly reported.
A point that trips people up: the premium is calculated on your “regular rate,” which under the FLSA can include some bonuses and shift differentials, not only your base hourly wage. If your pay includes those, your premium may be a little higher than the simple math above. Your employer’s payroll records are what count.
What counts as FLSA overtime
The Department of Labor explains the basics. Overtime under the Fair Labor Standards Act is pay for hours worked over 40 in a workweek, which is a fixed, recurring period of 168 hours (seven 24-hour days). Each workweek stands alone; hours can’t be averaged over two weeks. So working 45 hours one week and 35 the next still means 5 hours of overtime in the first week, even though the two-week total is 80.
Not everyone is covered. Many salaried workers in executive, administrative and professional roles are “exempt” from overtime under the FLSA. If you’re exempt, your employer doesn’t have to pay overtime, and any extra pay you do get may not count as qualified overtime for this deduction.
Who is likely to miss out
- Salaried workers who are exempt from overtime. If the FLSA doesn’t require your employer to pay you overtime, there is no qualifying premium to deduct.
- Overtime that goes beyond the federal rule. The IRS ties the deduction to overtime “required by the FLSA.” Extra premiums from a state law or a union contract (for example, daily overtime or double time) may not all qualify. Check the IRS guidance before counting them.
- Married people filing separately. The IRS says married taxpayers must file jointly to claim it.
- Higher earners. The deduction shrinks above $150,000 of modified adjusted gross income ($300,000 joint).
What doesn’t change
- Your employer still owes you the same overtime pay.
- Social Security and Medicare are still taken out of overtime pay; the deduction affects federal income tax.
- Your state may or may not follow the federal deduction.
Should you work more overtime because of this?
The deduction makes overtime a little more valuable after tax, but not dramatically. In Luis’s case above, each overtime hour earns $36 before tax either way; the deduction saves income tax on $12 of it. At a 12% rate, that’s about $1.44 an hour. Worth claiming, but not a reason to burn out. Decide on extra hours based on the pay, your energy and your family, and treat the tax break as a bonus.
Common mistakes
- Deducting the whole overtime check. Only the premium above your regular rate counts.
- Counting double time in full. The deduction is tied to FLSA-required overtime pay. Extra premiums required only by a contract or state rule may not qualify.
- Forgetting the cap. $12,500 single, $25,000 joint, and less once income passes the phase-out.
- Assuming it applies to payroll taxes. Social Security and Medicare are still due on all of your overtime pay.
- Missing the end date. As written, the deduction covers tax years 2025 through 2028.
Practical steps
- Check your pay stubs. Make sure overtime hours and rates are listed and correct. Our guide to calculating overtime pay shows how to check them.
- Watch for the reported amount. The IRS has issued guidance on how qualified overtime is reported to workers. Keep your last pay stub of the year in case your forms need correcting.
- Consider your withholding. If you expect a sizable deduction, the IRS explains how to update withholding so you see the benefit during the year instead of only at tax time.
The deduction is temporary, scheduled for 2025 through 2028, so it’s worth claiming correctly each of those years.
