No Tax on Overtime: What It Really Means for You
You've probably heard the promise: "No tax on overtime." If you're someone who regularly works more than 40 hours a week, those four words probably caught your attention. And for good reason. Extra hours should mean extra money in your pocket, not just a bigger chunk going to the IRS.
The good news is that a real tax break for overtime does exist now, signed into law on July 4, 2025, as part of the One Big Beautiful Bill Act (also called the Working Families Tax Cut). The not-so-good news? It doesn't work quite the way many people think it does.
Let's break down exactly what this deduction covers, who qualifies, what it doesn't do, and what steps you'll need to take when you file your 2025 taxes.
What the New Overtime Deduction Actually Is (and Isn't)
Let's start with the biggest misconception. The phrase "no tax on overtime" sounds like all your overtime pay is completely tax-free. It isn't.
What actually happened is that Congress created a new federal income tax deduction for a portion of your overtime pay. That's a meaningful difference. A deduction lowers the amount of income you're taxed on. It doesn't erase taxes entirely.
Here's a quick way to think about it. If you normally earn $25 per hour and you're paid $37.50 per hour for overtime (time and a half), only the extra $12.50 per hour qualifies for the deduction. That $12.50 is what the IRS calls the "overtime premium," and it's the only part that can be deducted.
What the Deduction Doesn't Cover
Even with this deduction, you'll still pay:
Social Security and Medicare taxes (FICA) on all your overtime earnings. These payroll taxes apply no matter what.
State and local income taxes in most states. This federal deduction does not flow through to your state return unless your state passes its own law. For workers in Georgia, South Carolina, and North Carolina, overtime remains taxable at the state level as of early 2026 (though some state bills are in progress).
Federal income tax on any overtime that exceeds the deduction cap or if your income is above the phase-out threshold.
Bottom line: this is a real tax break, and it can put real money back in your pocket. But it's not a free pass from all taxes on your overtime pay.
Do You Qualify? The Key Requirements
Not every worker who puts in extra hours will be eligible for this deduction. Here's what you need to know.
You Must Be FLSA-Eligible ("Nonexempt")
The deduction only applies to overtime that's required under the federal Fair Labor Standards Act (FLSA). In plain terms, you need to be what the Department of Labor calls a "nonexempt" employee. This typically includes hourly workers who earn overtime at time-and-a-half for hours worked beyond 40 in a workweek.
If your employer classifies you as "exempt" (meaning salaried and not entitled to FLSA overtime), this deduction doesn't apply to you, even if you regularly work 50-hour weeks.
Some examples of workers who commonly qualify: construction workers, warehouse staff, electricians, plumbers, nurses (in many roles), administrative assistants, manufacturing workers, retail employees, restaurant staff, and many other hourly positions.
Some examples of workers who typically don't qualify: salaried managers, executives, licensed professionals earning above the salary threshold, teachers, and outside salespeople.
Only FLSA-Required Overtime Counts
This is a nuance that trips up a lot of people. The deduction applies only to overtime required by the FLSA, not overtime required by state law, union contracts, or company policy that goes beyond federal requirements.
For example, some states require overtime for working more than eight hours in a single day (even if you don't exceed 40 hours for the week). That state-mandated overtime does not qualify for this federal deduction. Similarly, if your union contract gives you overtime for weekend shifts but you haven't exceeded 40 weekly hours under the FLSA, that overtime doesn't count either.
Income Limits Apply
The deduction is capped and phases out at higher incomes:
Maximum deduction: $12,500 per year for single filers, $25,000 for married filing jointly.
Phase-out begins at $150,000 in modified adjusted gross income (MAGI) for single filers, $300,000 for joint filers.
The deduction is reduced by $100 for every $1,000 above those thresholds.
Complete phase-out: $275,000 for single filers, $550,000 for joint filers.
The good news? Those thresholds are high enough that the vast majority of overtime earners will receive the full benefit.
Other Requirements
You need a valid Social Security number.
If you're married, you must file jointly. Married Filing Separately is not eligible.
Business owners: If you own 20% or more of a C or S corporation and actively help run it, you're exempt from overtime under the FLSA. You can't pay yourself overtime and benefit from this deduction.
5 Common Misconceptions About "No Tax on Overtime"
There's a lot of confusion floating around about this provision. Let's clear up the biggest myths.
Misconception #1: "All my overtime is completely tax-free now."
Not quite. Only the "premium" portion of your overtime pay (the extra half in time-and-a-half) is deductible, and only from federal income tax. Your base rate for those hours, plus payroll taxes on the full amount, still apply.
Misconception #2: "My paycheck will get bigger right away."
Your employer is still required to withhold federal income tax, Social Security, and Medicare from your overtime pay just like before. However, you can update your W-4 to adjust your withholding if you expect to claim this deduction. The IRS updated the 2026 W-4 deductions worksheet to include a field for overtime. Otherwise, you'll see the benefit when you file your tax return.
Misconception #3: "Any extra hours I work count."
Only overtime hours that meet FLSA requirements (generally, hours beyond 40 in a workweek for nonexempt employees) qualify. Extra shifts on weekends, holiday premium pay, or overtime under state-only rules don't count unless the hours also trigger FLSA overtime.
Misconception #4: "I'm a salaried employee, so this helps me too."
It depends. If you're salaried but classified as nonexempt under the FLSA (meaning you're still entitled to FLSA overtime), you could qualify. But most salaried workers are classified as exempt and won't be eligible. Check with your HR department if you're unsure about your classification.
Misconception #5: "This is a permanent law."
It's temporary. The overtime deduction is available only for tax years 2025 through 2028. After that, Congress would need to pass new legislation to extend it.
How Much Could You Actually Save?
Let's put some real numbers to this so you can see what it means for your situation.
Say you earn $22 per hour and work an average of 10 hours of overtime per week at time-and-a-half ($33/hour). Your overtime premium is $11 per hour (the "extra half"). Over a full year, that adds up to about $5,720 in deductible overtime premium.
If you're in the 22% federal tax bracket, that deduction would save you roughly $1,258 in federal income taxes. Not life-changing, but not nothing either. That's money that would have gone to the IRS and now stays with you.
A worker earning $30 per hour with consistent overtime might see closer to $1,500 to $2,000 in savings. Workers at the deduction cap of $12,500 could save as much as $2,750 to $3,000 depending on their tax bracket.
Keep in mind: if your employer pays double time rather than time-and-a-half, you still only deduct the FLSA-required premium (the 0.5x portion). So if you earn $40/hour regular and $80/hour for overtime, only $20 per hour is deductible, not $40.
How to Calculate Your Qualified Overtime for 2025
Because 2025 is a transition year, the IRS is giving everyone some flexibility. Your employer isn't required to separately report your "qualified overtime compensation" on your W-2 this year. That changes for 2026 and beyond, when employers will need to use a new Box 12 code ("TT") on your W-2.
For 2025, the IRS allows several methods to figure your deductible amount:
Method 1: Your Employer Provides It
Some employers may voluntarily report your qualified overtime in Box 14 ("Other") of your W-2, through an online portal, or in a separate written statement. If your employer provides this number, you can simply use it.
Method 2: Your Pay Stub Shows the Premium Separately
If your pay stub lists the "overtime premium" as its own line item, use that total for the year.
Method 3: Your Pay Stub Shows Total Overtime Pay
This is the most common scenario. If your pay stub shows a single combined "overtime" amount (your regular rate plus the premium), divide that total by 3 to estimate the premium portion. For example, if your total overtime pay for 2025 was $18,000, your qualified overtime compensation would be approximately $6,000 ($18,000 divided by 3).
If your employer pays double time instead of time-and-a-half, divide by 4 instead of 3. The IRS provided this formula in Notice 2025-69.
Method 4: Comp Time Payouts
If you work for a state or local government and received comp time payouts in 2025, you can deduct one-third of those payout wages as your overtime premium.
Whichever method you use, keep your pay stubs, earnings statements, and any employer communications about overtime for your records. You'll need them to support your deduction.
How to Claim the Deduction on Your Tax Return
When you file your 2025 federal tax return (due April 15, 2026), here's the process:
1. Calculate your qualified overtime compensation using one of the methods above.
2. Fill out Schedule 1-A. This is a brand-new IRS form created specifically for the deductions introduced by the One Big Beautiful Bill Act. You'll use Part III of Schedule 1-A for the overtime deduction. You'll also report your modified adjusted gross income (MAGI) in Part I so the IRS can determine if the phase-out applies to you.
3. Transfer the total to Form 1040. Your deduction amount from Schedule 1-A goes on Line 13b of your Form 1040. This reduces your taxable income.
4. File Schedule 1-A with your return. You must include it whether you file on paper or electronically.
Important note: this is a "below-the-line" deduction. That means it lowers your taxable income but does not reduce your adjusted gross income (AGI). Your AGI still matters for things like eligibility for other credits and deductions, Roth IRA contributions, and certain tax benefits. Don't expect those to change because of this deduction.
You do not need to itemize to claim this deduction. You can take the standard deduction and still claim the overtime deduction on Schedule 1-A. They work independently.
A Note for Workers in the Southeast
If you live in a state like Georgia, South Carolina, or North Carolina, it's worth understanding that this federal deduction does not automatically carry over to your state income taxes. As of early 2026, overtime remains fully taxable at the state level in these states.
However, all three states have introduced bills that would create similar state-level deductions or exemptions for overtime. South Carolina introduced House Bill 3298, which would exempt all overtime income from state taxes. Georgia introduced House Bill 375. North Carolina's House Bill 11 would provide a state deduction for overtime along with tips and bonuses.
None of these bills have become law as of February 2026, but they're worth watching. If your state does pass similar legislation, the combined federal and state savings could be even more significant.
Workers in Tennessee and Florida benefit from having no state income tax at all, so the federal deduction is the whole story for you.
What to Do Right Now
Whether you've already filed your 2025 return or you're still gathering your paperwork, here are your next steps:
1. Gather your documentation. Pull together your 2025 pay stubs, W-2 (especially Box 14), and any separate overtime statements from your employer. If your employer provides an online portal, check there too.
2. Calculate your premium. Use one of the IRS-approved methods described above to figure your qualified overtime compensation for 2025.
3. Check if the phase-out applies. If your MAGI is under $150,000 (single) or $300,000 (joint), you'll get the full deduction up to the cap. If your income is higher, you'll need to calculate the reduced amount.
4. Consider adjusting your withholding for 2026. The IRS updated the W-4 form to include a field for overtime deductions (Step 4b, Section 1b). Updating your withholding now could put more money in your pocket throughout the year instead of waiting for a refund.
5. Talk to a tax professional if you're unsure. This deduction is new, the rules are specific, and 2025 is a transition year with extra flexibility. A qualified tax advisor can make sure you're claiming everything you're entitled to and doing it correctly.
When It Feels Like Too Much to Figure Out on Your Own
Navigating new tax law is rarely simple, especially in a transition year when even the IRS is still working out the details. If you'd rather have someone in your corner who understands the nuances, the team at Core Financial can help.
Whether you're an employee trying to make sure you're claiming every dollar you deserve, or a business owner fielding questions from your team about how overtime is reported, Core Financial provides the kind of straightforward guidance that takes the guesswork out of tax season.
