Guide
No tax on overtime, explained
It is a deduction, not an exemption. Here is exactly what that means for your money.
The short version
For tax years 2025 through 2028 you can deduct your qualified overtime compensation — capped at $12,500, or $25,000 if you are married filing jointly — from the income the federal government taxes you on. It is an above-the-line style deduction, so you get it whether or not you itemise.
The Treasury expects roughly 9% of returns to claim it, with an average cut of about $1,440.
Qualified overtime is not your overtime pay
This is the single biggest misunderstanding. Under the Fair Labor Standards Act, overtime is paid at one and a half times your regular rate. The law lets you deduct only the premium — the extra half. The base portion is ordinary wages, taxed normally.
Twelve overtime hours at $30 an hour pays $540. Of that, $360 is the base and $180 is the premium. Only the $180 is deductible.
The income phase-out
Once your modified adjusted gross income passes $150,000 — $300,000 for joint filers — the deduction shrinks by $100 for every full $1,000 above the threshold. A single filer is completely phased out at $275,000.
Why your paycheck will look identical
Payroll withholding tables were not rebuilt around this deduction. Your employer withholds the same tax it always did, so nothing about your take-home pay changes during the year. The deduction reduces your tax when you file, which usually means a larger refund in early 2027.
People who expected fatter paychecks in 2026 were not misinformed about the law existing — they were misinformed about the mechanism.
What still comes out of overtime
Social Security at 6.2% and Medicare at 1.45% apply to every overtime dollar, premium included. State income tax generally applies too, because most states did not adopt the federal deduction.
Your W-2 has to show it
From tax year 2026, qualified overtime must be reported separately on Form W-2, and only separately reported overtime is deductible. If your employer is not tracking the premium portion, you could lose the deduction through no fault of your own. It is worth asking payroll before the year closes.
Try it with your own hours
Your estimated qualified overtime deduction
$4,608
Cuts your taxable income by $4,608 when you file.
Federal tax you would save
$553
Roughly $553 more refund, or that much less owed, for tax year 2026.
Your paycheck will not change. Your employer keeps withholding tax the same way. This deduction only shows up when you file your return in early 2027 — it arrives as a bigger refund, not as bigger paychecks.
How we got there
Your year at a glance
Estimate for tax year 2026 using the published IRS figures. It assumes you take the standard deduction, have no dependents or credits, and that all of your overtime is FLSA-qualifying and separately reported by your employer. It is not tax advice.
Figures on this page are for tax year 2026 and were last checked against the primary sources on 2026-07-31. See our sources. This is an estimate, not tax advice.