No Tax on Overtime: Complete Guide
What Is the No Tax on Overtime Deduction?
The One Big Beautiful Bill Act (P.L. 119-21), signed into law on July 4, 2025, created a new federal tax deduction for qualified overtime compensation. Under IRC §225, eligible workers can deduct the overtime premium portion of their pay — the extra 0.5x above their regular hourly rate — from their federal taxable income.
This is an above-the-line deduction claimed on Schedule 1. You do not need to itemize to claim it. The deduction is effective for tax years 2025 through 2028.
Who Qualifies?
To claim the overtime tax deduction, you must meet all of the following requirements:
- FLSA §7 covered employment — You must work in a job covered by the overtime provisions of the Fair Labor Standards Act. Salaried exempt employees are not eligible.
- W-2 employee — The deduction applies to wages reported on Form W-2. Self-employed workers and independent contractors (1099) are not eligible.
- Valid Social Security number — Required for claiming the deduction.
- Eligible filing status — Single, head of household, or married filing jointly. Married filing separately is not eligible.
How Does It Work?
The 0.5x Premium
Only the overtime premium portion is deductible — that's 0.5x your regular hourly rate. When you work overtime, you're paid 1.5x your rate: the first 1.0x is regular pay, and the extra 0.5x is the deductible premium.
Annual Deduction Caps
| Filing Status | Maximum Deduction |
|---|---|
| Single | $12,500 |
| Head of Household | $12,500 |
| Married Filing Jointly | $25,000 |
| Married Filing Separately | Not Eligible |
Income Phaseout
The deduction phases out for higher earners. It decreases by $100 for every $1,000 of MAGI over the phaseout threshold:
| Filing Status | Phaseout Starts | Deduction Fully Phased Out |
|---|---|---|
| Single / HoH | $150,000 | $275,000 |
| Married Filing Jointly | $300,000 | $550,000 |
FICA Still Applies
The overtime deduction reduces your federal income tax only. You still owe Social Security tax (6.2% on wages up to $176,100 in 2025) and Medicare tax (1.45% on all wages) on your full overtime pay.
Key Dates
| Date | Event |
|---|---|
| July 4, 2025 | P.L. 119-21 signed into law |
| Tax Year 2025 | Transition year — IRS Notice 2025-62 provides guidance |
| Tax Year 2026+ | Employers report qualified OT via W-2 Box 12 code TT |
| Tax Year 2028 | Last year the deduction is available (unless renewed) |
About the Law
The No Tax on Overtime deduction is part of the One Big Beautiful Bill Act (OBBBA), which also created deductions for qualified tips (up to $25,000/year) and additional benefits for seniors. The law amends the Internal Revenue Code by adding §225 for overtime and §224 for tips.
Frequently Asked Questions
What is the No Tax on Overtime deduction?
It is a federal income tax deduction for the overtime premium portion of your pay (0.5x your hourly rate for hours over 40/week). Created by the One Big Beautiful Bill Act (P.L. 119-21), signed July 4, 2025. Effective for tax years 2025-2028.
How much can I deduct for overtime?
Up to $12,500 per year if you file as single or head of household, or $25,000 if married filing jointly. The deduction phases out starting at $150,000 MAGI (single/HoH) or $300,000 (MFJ).
Who qualifies for the overtime tax deduction?
W-2 employees in FLSA §7 covered positions with a valid SSN. You must file as single, head of household, or married filing jointly. Salaried exempt employees and MFS filers are not eligible.
Does the overtime deduction reduce FICA taxes?
No. The deduction only reduces federal income tax. You still owe Social Security (6.2%) and Medicare (1.45%) on all overtime pay.
When does the No Tax on Overtime deduction expire?
The deduction is effective for tax years 2025 through 2028. It expires after the 2028 tax year unless Congress extends the provision.