How the no tax on overtime deduction works
From 2025 through 2028, workers can deduct the premium part of qualified overtime pay from federal taxable income. It is a deduction, not an exemption: your overtime is still on your W-2 and still taxed for Social Security and Medicare, but up to $12,500 of the premium ($25,000 on a joint return) comes off your income before the federal brackets apply. You claim it on Schedule 1-A whether or not you itemize.
The saving equals the deduction times your tax bracket. A worker in the 22% bracket who deducts $5,000 saves about $1,100 of federal income tax — the calculator works out the exact figure, including when the deduction pulls part of your income into a lower bracket.
What counts as qualified overtime
- Only overtime the Fair Labor Standards Act requires. That generally means hours over 40 in a workweek for non-exempt employees. Overtime paid only because of a union contract, a company policy or a state law (such as California’s daily overtime) does not qualify unless the FLSA also required it.
- Only the premium. For time-and-a-half, the deductible part is the extra half: a $30/hour worker paid $45 for an overtime hour can deduct $15 of it.
- Double time counts only up to half-time. The FLSA requires 1.5×, so the extra pay above that is not qualified.
- Salaried exempt employees — most managers, professionals and outside salespeople — are not covered by FLSA overtime and cannot use the deduction.
Limits, phase-out and who can claim
The cap is $12,500 per return ($25,000 if married filing jointly). Above $150,000 of modified adjusted gross income ($300,000 joint), the deduction shrinks by $100 for every $1,000 of extra income. You need a valid Social Security number, and married couples must file a joint return — a married-filing-separately return gets nothing.
Overtime and your state taxes
States decide for themselves. In the nine states with no tax on wages — including Texas and Florida — overtime is already free of state income tax. Some states copy the federal deduction, but large states such as California have not, so the overtime premium stays fully taxable on the state return. Pick your state in the calculator to see which applies.
How to claim it
Add up your qualified overtime premium for the year from your pay stubs or the statement your employer provides, then enter it on Schedule 1-A and carry the deduction to Form 1040. Your paycheck withholding does not change automatically, so most people see the saving as a larger refund. If you want it in each check instead, you can lower withholding on a new W-4 (Step 4(b), deductions) — use the paycheck calculator to check the result first.