If you like how working overtime boosts your paycheck, you’ll love how it can supersize your tax refund or cut your tax bill. That’s because there’s a brand new tax deduction for overtime pay. It’s called the “No Tax on Overtime” deduction—or simply the overtime deduction, for short—and you can claim it for the first time on the tax return you’ll file this year.
The overtime deduction is one of four new tax deductions created by the “One Big Beautiful Bill,” which was signed into law in July 2025. But because it’s so new, most people aren’t very familiar with it. For instance, do you know who qualifies for the deduction, exactly what it covers (and what it doesn’t), how much the deduction is worth, or how to claim it?
Don’t worry if you can’t answer these (or other) questions. We’ll provide the information you need to get the most out of the “No Tax on Overtime” deduction as possible.
Table of Contents
Who Qualifies for the Overtime Deduction?
You generally qualify for the overtime deduction on your tax return for the 2025 tax year (i.e., the return you’ll file in 2026) if you can place a check mark next to all of the following requirements:
- You received “qualified overtime compensation” in 2025 (I’ll explain what that means next).
- You’re a covered and non-exempt worker under the Fair Labor Standards Act, or FLSA for short (that’s the federal law requiring overtime pay for covered workers).
- Your modified adjusted gross income, or MAGI, is less than $275,000 ($550,000 for married people filing a joint return).
- You have a Social Security number that’s valid for work in the U.S. and issued before the deadline for filing your return (including any tax filing extensions).
- You file a joint return, if you’re married.
Young and the Invested Tip: Unless you claim deductions or tax exemptions for foreign income or housing costs, or have tax-exempt income from certain U.S. territories, your MAGI will be the same as your adjusted gross income (AGI) reported on Line 11a of Form 1040 or Form 1040-SR.
What Pay Qualifies for the Overtime Deduction?
The overtime deduction is only available for “qualified overtime compensation.” So, what does that mean?
Let’s start with the FLSA requirements for overtime pay. The law generally states that workers covered by the FLSA, and not exempt from it, must receive overtime pay for any hours worked over 40 in a workweek. The overtime pay also has to be at a rate not less than one and one-half times the worker’s regular rate of pay.
For example: Suppose you’re normally paid $20 per hour. In one week you work 42 hours. For the first 40 hours, you’re still paid $20 per hour. However, under the FLSA, you must be paid at least $30 per hour for the last two hours you work that week ($20 x 1.5 = $30).
But the entire $30 per hour you’re paid in the example above isn’t deductible. That’s because the “No Tax on Overtime” deduction only applies to the “half” portion of the “one and one-half times” amount required under the FLSA. In other words, you can only deduct the “extra” amount that’s greater than your regular pay. So, instead of deducting $30 for each hour of overtime in the example, you can only deduct $10 per hour ($30 – $20 = $10).
You also can’t deduct:
- overtime pay that’s more than “time-and-a-half” pay required by the FLSA
- extra pay for weekends or holidays if you don’t work more than 40 hours in the workweek
- tips that qualify for the tip deduction
- overtime compensation paid to a worker who isn’t covered by, or is exempt from, the FLSA
Finally, there are special rules that allow overtime pay to be deducted if:
- overtime pay is based on a work period that’s longer than a standard 40-hour workweek, such as for certain firefighters and police officers
- overtime pay is allowed for working over eight hours per day or over 80 hours in a 14-day work period, such as for workers at hospitals and certain residential care facilities
- “Comp” time (i.e., time off from work) is given to certain government workers instead of overtime pay
Related: Guide to the New Senior Tax Deduction
How Much Is the Overtime Deduction?
You can generally deduct up to $12,500 of overtime pay earned during the tax year (up to $25,000 for joint filers). So, for example, if you’re single and receive $15,000 of overtime pay for the year, you can only deduct the first $12,500 of that pay. The remaining $2,500 isn’t deductible.
However, even after applying the $12,500 (or $25,000) limit, you might not be able to deduct all your overtime pay if your income is above a certain amount. That’s because the overtime deduction is gradually reduced if your MAGI exceeds $150,000 ($300,000 if you’re filing a joint return). If the phase-out is triggered, your deduction is cut by $100 for each $1,000 of MAGI over the $150,000 (or ($300,000) limit.
Example: Ralph is single and earned $12,000 in overtime pay in 2025. His MAGI for 2025 is $172,000. Since his MAGI is $22,000 over the $150,000 limit for single taxpayers, Ralph’s $12,000 overtime deduction is reduced by $2,200. To calculate the reduction, first divide $22,000 by 1,000, which equals $22. Then multiple that amount by $100, which comes to $2,200. As a result, Ralph can only deduct $9,800 of his overtime pay ($12,000 – $2,200 = $9,800).
Based on this formula, the maximum overtime deduction—$12,500, or $25,000 for joint filers—is completely phased out if your MAGI reaches $275,000 ($550,000 for a joint return). If your overtime pay for the year is less than the $12,500 or $25,000 maximum, a lower MAGI amount will reduce your deduction to $0.
Related: New SALT Deduction Cap: How It Works and Who It Helps
How Much Will the Overtime Deduction Actually Save You?
Even if you qualify for the maximum overtime deduction of $12,500, or $25,000 for joint filers, you won’t actually save that much money when you file your tax return. If this was a tax credit, your savings would match the tax break’s amount. However, unlike tax credits, tax deductions don’t reduce the tax you owe on a dollar-for-dollar basis.
But the overtime deduction will lower your taxable income, which is still a pretty good thing because less taxable income translates to a smaller tax bill. Just understand that your actual savings are only a fraction of the total deduction amount—and the fraction used is based on the tax rate associated with your tax bracket.
Example: Jeff and Sarah are married, file a joint return, and qualify for a $25,000 overtime deduction for the 2025 tax year. The deduction drops their 2025 taxable income from $200,000 to $175,000 (both amounts are in the 22% tax bracket for joint filers). Without the deduction, Jeff and Sarah would owe $33,828 in taxes. With the deduction, they only owe $28,328—a total savings of $5,500 ($25,000 x .22 = $5,500).
And your savings will be even greater if the overtime deduction drops you down to a lower tax bracket!
Related: “No Tax on Tips” Explained
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Will Deductible Overtime Pay Be Reported on My W-2 Form?
The Form W-2 you receive this year that reports the wages you earned in 2025 might tell you how much overtime you can deduct in Box 14. But employers aren’t required to include that information on the form.
If your employer doesn’t include deductible overtime on your W-2, they still might provide that information on a separate statement. But, again, they’re not required to do that, either.
Freelancers and other independent contractors are in a similar situation. Deductible overtime might be reported on a Form 1099 or separate statement from the person or business you did work for last year—but it might not.
So, what if you don’t get anything from your employer (or other person who hired you to do a job) telling you how much “qualified overtime compensation” you earned in 2025? If that’s the case, you can use pay stubs, earnings statements, invoices, or similar records to determine how much overtime you can deduct.
Just remember what is and isn’t deductible overtime pay (as discussed earlier). Those other records might distinguish between the two and/or lump them all together, so you may have to break out the deductible part yourself. If you need help, check with your employer first. If they can’t help, you might want to ask a tax professional.
What about next year? Fortunately, the IRS is updating Forms W-2, 1099-MISC, and 1099-NEC so employers, as well as people or businesses paying independent contractors, can separately report deductible overtime pay earned in 2026 on those forms. Thus, when you file your tax return for the 2026 tax year (which you’ll do in 2027), you can get the information you need to claim the overtime deduction from these forms.
Related: 4 New Tax Deductions In the ‘One Big Beautiful Bill’
Can I Claim the Overtime Deduction If I Take the Standard Deduction?
You can claim either the standard deduction or itemized deductions on your federal income tax return—but not both. However, for purposes of claiming the overtime deduction, it doesn’t matter which one you pick.
That’s because the overtime deduction is a “below-the-line” deduction, which simply means the line on your tax return where the deduction is subtracted from your income (Line 13b) is below the line where your AGI is found (Line 11a).
Below-the-line deductions aren’t tied to either the standard deduction or itemized deductions, so you can claim them whether you take the standard deduction or itemize.
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How Do I Claim the Overtime Deduction?
You must calculate and claim the “No Tax on Overtime” deduction on Schedule 1-A. The overtime deduction is then added to any deductions for tips, car loan interest, and people at least 65 years old—with the combined total reported at the very end of Schedule 1-A.
That total is then reported as a “below-the-line” deduction on Line 13b of Form 1040 or Form 1040-SR. It’s then subtracted from your AGI—along with any other below-the-line deductions (including the standard deduction or itemized deductions)—to arrive at your federal taxable income.
Related: How Can I Lower My Taxes in Retirement?
Does “No Tax on Overtime” Really Mean There Are No Taxes on Overtime Pay?
Despite the “No Tax on Overtime” nickname, the overtime deduction does not completely eliminate all taxes on overtime pay.
For instance, it doesn’t even wipe out federal income taxes for everyone. Remember, if your income is too high, the overtime deduction can be chopped down to nothing. Plus, some people don’t qualify for the deduction, and some overtime pay doesn’t, either.
In addition, overtime pay is still subject to Social Security and Medicare taxes (jointly referred to as FICA taxes). These payroll taxes are paid by both employers and their employees (the employer withholds the employee’s portion from each paycheck)—each paying 7.65% of taxable wages, tips, and other compensation. Higher-income employees must also pay a 0.9% additional Medicare tax.
Freelancers and other independent contractors don’t pay FICA taxes, but they do pay self-employment taxes on any overtime pay. This is basically equivalent to the combined total of both the employer’s and the employee’s portion of FICA taxes—so, 15.3%. But at least 50% of the self-employment tax is deductible for federal income tax purposes.
Finally, you might have to pay state and/or income taxes on your overtime compensation. Whether these taxes apply depends on where you live. Check with the tax agency for your state to find out if overtime pay is taxed at the state level in your location.
Related: When and How to Adjust Your Tax Withholding
Will the Overtime Deduction Expire?
The overtime deduction is a temporary tax break that’s only available for the 2025 to 2028 tax years. It’s set to expire in 2029.
However, expiring tax breaks are sometimes extended or made permanent. Right now, it’s too difficult to predict whether that will happen with the overtime deduction. But it may depend on who controls Congress and the White House after the 2028 election.
Related: How Is Retirement Income Taxed?
Copyright © 2026 by Rocky Mengle. All rights reserved. Used with permission.
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