No Tax on Overtime 2026: Who Qualifies, the $12,500 Cap, and How to Claim It

The Short Version

If you're a non-exempt worker under the Fair Labor Standards Act — meaning you're legally entitled to time-and-a-half for hours over 40 per week — you can now deduct the overtime premium from your federal taxable income. The premium is the extra "half" in time-and-a-half. Not the base rate for those hours. Just the bonus portion.

Cap: $12,500 per year for single filers. $25,000 for married filing jointly.

That's it. That's the deduction. But the details of who qualifies and who doesn't are where most people get tripped up.

Who Actually Qualifies

This is the single most important question, and the answer is narrower than most people expect.

You qualify if:

1. You are non-exempt under the FLSA. The Fair Labor Standards Act is a federal law that requires employers to pay overtime (at least 1.5x your regular rate) for hours worked beyond 40 in a workweek. If you're covered by this requirement, you qualify.
2. You receive a W-2 or 1099. Both employees and certain self-employed individuals can claim the deduction.
3. Your MAGI is below the phase-out threshold. Under $150,000 for single filers, $300,000 for joint filers.

You don't qualify if:

• You're a salaried exempt employee. This is the big one. If you're a salaried manager, professional, or administrative worker earning above the FLSA salary threshold ($684/week), you're almost certainly classified as exempt. No FLSA overtime entitlement = no deduction. It doesn't matter if you work 60 hours a week.
• Your employer pays overtime voluntarily but isn't required to by FLSA. Some companies pay overtime as a policy even when they're not legally required to. That overtime doesn't count.

So who does this actually help? Hourly workers, mostly. Construction crews, nurses, factory workers, retail staff, warehouse employees, truck drivers. The people who punch a clock, work past 40 hours, and see time-and-a-half on their pay stubs.

Wait — Only the "Half" Part?

Yes, and this confuses a lot of people. Let's walk through it.

Say your regular rate is $30/hour. When you work overtime, you earn $45/hour (time-and-a-half). The deductible portion is only the $15 premium — the extra half. The base $30 for those overtime hours is still taxable income like any other hour you worked.

Here's what that looks like over a year:

A construction worker pulling 10 hours of overtime per week at $35/hour saves about $2,000 a year in federal taxes. That's meaningful — it's roughly the cost of a decent set of work tools, or two months of car payments.

The Phase-Out

The deduction starts shrinking once your modified adjusted gross income crosses certain thresholds:

The reduction rate is $100 for every $1,000 over the threshold. So a single filer at $200,000 MAGI would lose $5,000 of their potential $12,500 deduction — leaving $7,500 available.

But let's be real: a non-exempt hourly worker with a MAGI over $150,000 is working a lot of overtime or has significant other income. For most people this deduction targets, the phase-out won't matter.

Your W-2 Is Changing

Starting with tax year 2026, employers must report qualified overtime compensation separately on your W-2 using Box 12, Code "TT." This is new — previously, overtime was lumped into your total wages in Box 1 and there was no way to break it out without looking at your pay stubs.

For the 2025 return you're filing right now, this separate reporting isn't required yet. You'll need to calculate your overtime premium yourself (or your tax software will ask for it). If you've got access to your year-end pay stubs, add up all the overtime premium amounts. That's your deductible figure, capped at $12,500.

This Doesn't Touch Your Paycheck — Yet

Here's a thing people get wrong: this deduction doesn't reduce your withholding automatically. Your employer will still withhold federal income tax from your overtime pay at the normal rate throughout the year. You get the money back when you file your return.

That said, you can adjust your W-4 right now to account for the deduction. The IRS recently updated its Tax Withholding Estimator to reflect the OBBB changes. If you'd rather see the savings spread across each paycheck instead of waiting for a refund, update your W-4 with your employer.

Run your numbers first, though. Use the US tax calculator to see your total 2026 tax picture before you start adjusting withholding.

Payroll Taxes — Same Story as Tips

Just like the no-tax-on-tips provision, this deduction only applies to federal income tax. Social Security (6.2%) and Medicare (1.45%) still apply to every dollar of overtime, including the premium portion.

On $10,000 of overtime premium, that's $765 in payroll taxes you can't avoid. But the income tax savings at the 22% bracket would be $2,200. Net benefit: still solidly positive.

How It Stacks With Other OBBB Deductions

You can claim the overtime deduction and the tip deduction in the same year if you qualify for both. A bartender who works overtime, for instance, could deduct up to $25,000 in tips AND $12,500 in overtime premium. They're separate above-the-line deductions. No conflict.

You can also stack these with the $16,100 standard deduction (or $32,200 MFJ). They reduce your AGI before the standard deduction even kicks in.

This Expires After 2028

Same sunset as the tips deduction. The no-tax-on-overtime provision covers tax years 2025 through 2028 and then expires unless Congress acts. Four years. Use them.

Who This Helps Most — And Who It Doesn't Help At All

The kicker is that the people who work the most unpaid overtime — salaried professionals in tech, law, finance — get nothing from this. The deduction is specifically tied to FLSA, which exempts most of them. It's a blue-collar tax break, and it's designed that way.

Sources: IRS guidance on the No Tax on Overtime deduction (Section 225), One Big Beautiful Bill Act (signed July 4, 2025), Fair Labor Standards Act overtime provisions (29 U.S.C. § 207), Department of Labor non-exempt classification rules, IRS Rev. Proc. 2025-19 for 2026 bracket data. All take-home calculations via FiscalFold using official IRS parameters.