No Tax on Overtime
For 2025 through 2028, hourly workers can deduct the extra "half" of time-and-a-half pay: up to $12,500 a year single, $25,000 married filing jointly. For a household in the 22% bracket, a full $25,000 deduction is worth $5,500 of federal income tax.
Reviewed by Ebot Mbi, CPA, EA · Last reviewed October 9, 2026
Who it fits
- Hourly employees paid time-and-a-half under the Fair Labor Standards Act
- Two-earner households where both spouses work regular overtime
- Tradespeople, nurses, first responders and plant workers with heavy overtime seasons
- Business owners who want to explain the benefit to an hourly workforce
Who it's not for
- Salaried employees classified as exempt from overtime rules
- Married couples who file separately; the deduction requires a joint return
- Anyone expecting payroll tax relief; Social Security and Medicare still apply
How it works
Only the premium counts. If your regular rate is $40 an hour and overtime pays $60, the deductible part is the $20 premium, not the full $60. The base pay remains taxable like any other wage.
The overtime must be required by the federal Fair Labor Standards Act, which generally means hours over 40 in a workweek. Extra pay required only by a union contract, a state law, or company policy (daily overtime, double time, holiday premiums) does not qualify on its own.
The cap is $12,500 per return for single filers and $25,000 for joint filers. It begins to phase out when modified adjusted gross income passes $150,000 single or $300,000 joint, shrinking by $100 for every $1,000 above the line.
You do not need to itemize. The deduction is taken in addition to the standard deduction of $16,100 single or $32,200 joint. It lowers income tax only; it does not reduce adjusted gross income or payroll taxes.
Employers report qualified overtime to the IRS and to you. Keep your final pay stubs for the year in case the reported figure needs to be supported.
Illustrative example
Illustrative: a married couple filing jointly with $210,000 of combined wages. One spouse earns $40 an hour and works 600 FLSA overtime hours at $60. The other earns $36 an hour and works 300 overtime hours at $54. Their top federal bracket is 22%.
- Spouse one premium: ($60 − $40) × 600 hours = $12,000
- Spouse two premium: ($54 − $36) × 300 hours = $5,400
- Total qualified overtime premium: $12,000 + $5,400 = $17,400
- Joint cap is $25,000 and income is below $300,000, so the full $17,400 is deductible
- Tax saved at 22%: $17,400 × 22% = $3,828
The couple keeps about $3,828 more of their overtime pay in federal income tax for the year.
The rules
| Rule | Citation |
|---|---|
| Only the premium portion of overtime required by the Fair Labor Standards Act is deductible. | IRC §225; 29 U.S.C. §207 |
| The deduction is capped at $12,500 ($25,000 joint) and phases out above $150,000 ($300,000 joint) of modified AGI. | IRC §225 |
| The deduction applies for tax years 2025 through 2028 and requires a valid Social Security number and, if married, a joint return. | IRC §225 (added by P.L. 119-21) |
| The deduction is allowed whether or not you itemize. | IRC §63(b) |
Watch-outs
- Deducting the full overtime paycheck instead of only the premium is the most common error and an easy one for the IRS to match.
- Overtime required only by state law or a labor contract, not by the FLSA, does not qualify.
- Withholding tables may not reflect the deduction; check whether you are over-withholding rather than waiting for a refund.
- The deduction ends after 2028 unless Congress extends it. Do not plan long-term cash flow around it.
What we do
We confirm which part of your overtime qualifies, reconcile it to your employer's reporting, and apply the cap and phase-out on your return. For business owners, we help payroll set up the reporting so employees receive the right figures.
Questions
Does the deduction lower my Social Security and Medicare tax?
No. Payroll taxes still apply to all overtime pay. The deduction reduces federal income tax only.
I am salaried but sometimes get paid for extra hours. Does that count?
Usually not. If you are classified as exempt from FLSA overtime, extra pay is not FLSA-required overtime, so it does not qualify.
Can I take this and the deduction for tips?
Yes. They are separate deductions with separate caps, and both are available in addition to the standard deduction.