How Does No Tax on Overtime Work?
How the Overtime Tax Deduction Works
The deduction reduces your federal taxable income by the overtime premium amount. It’s an above-the-line deduction on Schedule 1, meaning you can claim it whether you take the standard deduction or itemize. You do not need to choose between this deduction and the standard deduction — you get both.
Created by P.L. 119-21 §70202 (IRC §225), the deduction is available for tax years 2025 through 2028.
The 0.5x Premium Calculation
When you work overtime, you’re paid 1.5× your regular hourly rate. That 1.5× breaks into two parts:
- 1.0× (regular rate) — not deductible
- 0.5× (overtime premium) — deductible
Only the 0.5× premium is deductible. The total overtime pay (1.5×) is NOT the deduction amount. Only the premium (0.5×) counts. Source: IRS FAQ A1.
Annual Deduction Caps
The deduction is capped per year based on your filing status:
| Filing Status | Annual Cap |
|---|---|
| Single | $12,500 |
| Head of Household | $12,500 |
| Married Filing Jointly | $25,000 |
| Married Filing Separately | Not Eligible |
Source: IRS Newsroom — OBBBA Tax Deductions.
Income Phaseout
The deduction phases out for higher earners. It decreases by $100 for every $1,000 of MAGI above the threshold:
| Filing Status | Phaseout Starts | Fully Phased Out |
|---|---|---|
| Single / HoH | $150,000 | $275,000 |
| Married Filing Jointly | $300,000 | $550,000 |
Phaseout = floor((MAGI − threshold) / $1,000) × $100. If phaseout exceeds your deduction, the deduction is $0.
Source: IRS FAQ — phaseout rate $100 per $1,000.
Above-the-Line Deduction
This deduction is claimed on Schedule 1 of Form 1040. “Above-the-line” means it reduces your adjusted gross income (AGI) directly — you do not need to itemize. You get this deduction in addition to the standard deduction ($15,750 single, $31,500 MFJ, $23,625 HoH for 2025).
Source: P.L. 119-21 §70202.
FICA Taxes Still Apply
The overtime deduction does NOT reduce FICA taxes. Your full overtime pay remains subject to Social Security and Medicare taxes.
Example Calculation
Inputs: $25/hr, 10 OT hours/week, 50 weeks/year, single filer, $80,000 MAGI
| Step | Calculation | Result |
|---|---|---|
| Overtime premium | $25 × 0.5 × 10 × 50 | $6,250 |
| Cap check | $6,250 < $12,500 cap | No cap applied |
| Phaseout | $80,000 < $150,000 | No phaseout |
| Final deduction | — | $6,250 |
| Taxable income | $80,000 − $15,750 (std. deduction) | $64,250 |
| Marginal bracket | — | 22% |
| Tax savings | $6,250 × 22% | $1,375.00 |
| FICA still owed | $25 × 1.5 × 10 × 50 × 7.65% | $1,434.38 |
Source: Gate 0 reference scenario.
Frequently Asked Questions
Is total overtime pay (1.5x) deductible?
No. Only the premium portion (0.5× your hourly rate) is deductible, not the full 1.5× overtime pay. Source: IRS FAQ A1.
Do I need to itemize to claim this deduction?
No. It’s an above-the-line deduction on Schedule 1. You claim it in addition to the standard deduction.
What happens if my premium exceeds the cap?
The deduction is limited to $12,500 (single/HoH) or $25,000 (MFJ). Any premium above the cap is not deductible.
How does the phaseout work?
Your deduction decreases by $100 for every $1,000 of MAGI over the threshold ($150K single/HoH, $300K MFJ). At $275K (single) or $550K (MFJ), the deduction is fully eliminated.
Does this deduction reduce my state taxes?
No. The overtime deduction is federal only. It does not reduce state income tax in any state.