No Tax on Overtime 2025: Everything You Need to Know

The One Big Beautiful Bill Act (OBBBA) created a brand-new above-the-line tax deduction for overtime premium pay, allowing qualifying workers to deduct up to $12,500 of their overtime premium earnings from federal income tax. This deduction is available for tax years 2025 through 2028 and applies to hourly, non-exempt workers covered by the Fair Labor Standards Act. If you work overtime regularly, this deduction could save you hundreds or even thousands of dollars per year on your federal tax return.

Use our No Tax on Overtime Calculator to estimate exactly how much you could save based on your hourly rate, overtime hours, and filing status.

What Is the Overtime Tax Deduction?

The overtime tax deduction is an above-the-line deduction created by the OBBBA that lets qualifying workers subtract their overtime premium pay from their taxable income. An above-the-line deduction means you can claim it whether you take the standard deduction or itemize — it reduces your adjusted gross income (AGI) directly. The deduction covers the premium portion of overtime pay only, not the entire overtime paycheck. When you work time-and-a-half, for example, the deductible amount is the extra half — not the full 1.5x rate.

The deduction is capped at $12,500 per year and applies to tax years 2025 through 2028. Congress designed it as a temporary measure, though it could be extended or made permanent in future legislation. The deduction is claimed on the new Schedule 1-A, which was introduced alongside the OBBBA's other above-the-line deductions for tips and auto loan interest.

Who Qualifies for No Tax on Overtime?

The overtime deduction is available to workers who are covered by the Fair Labor Standards Act's overtime provisions. In practical terms, this means hourly, non-exempt employees who earn overtime pay at 1.5 times (or more) their regular rate. The vast majority of qualifying workers are hourly employees in industries like manufacturing, healthcare, construction, retail, and hospitality.

Salaried exempt workers — those who meet the FLSA's salary and duties tests for white-collar exemptions — generally do not qualify because they do not receive overtime pay. However, salaried non-exempt employees who do receive overtime compensation at 1.5x their effective hourly rate can claim the deduction. Independent contractors and self-employed workers do not qualify, because they are not covered by FLSA overtime rules.

There is no income phaseout for the overtime deduction itself. Whether you earn $30,000 or $130,000 per year, if you receive FLSA-covered overtime pay, you can deduct the premium portion up to $12,500. However, a higher AGI may affect other deductions and credits on your return.

The $12,500 Cap: How It Works

The maximum overtime deduction is $12,500 per year, but this cap applies to overtime premium pay, not total overtime earnings. This is a critical distinction. When you work overtime at time-and-a-half, your total overtime rate consists of two parts: your regular rate plus the 0.5x premium. Only the premium portion is deductible.

For example, if your regular rate is $20 per hour and you work 500 hours of overtime at $30 per hour (time-and-a-half), your overtime premium is $10 per hour (the extra half). Your total deductible amount would be $10 × 500 = $5,000, well under the $12,500 cap. To hit the full $12,500 cap at a $20/hr base rate, you would need to work 1,250 hours of overtime in a single year — roughly 24 hours of overtime per week.

Workers with higher base rates reach the cap more quickly. Someone earning $50 per hour would hit the $12,500 cap with just 500 hours of overtime, since their premium is $25 per hour. Use the New Tax Law Calculator to see how the overtime deduction interacts with your overall tax situation under the OBBBA.

How to Calculate Your Overtime Premium Pay

Your W-2 does not separate overtime premium pay from regular pay. Box 1 reports your total wages, including all overtime earnings, with no breakdown. This means you need to calculate the premium yourself using your pay stubs or payroll records.

The formula is straightforward: total overtime hours worked × (overtime rate − regular rate) = deductible overtime premium. For time-and-a-half, this simplifies to total overtime hours × 0.5 × regular rate. For double-time, the premium is total overtime hours × regular rate.

Here is a concrete example. Suppose you earn $25 per hour as your base rate. You work 10 hours of overtime per week for 52 weeks. Your overtime rate is $37.50 (time-and-a-half). Your premium per hour is $37.50 − $25.00 = $12.50. Your annual overtime premium is $12.50 × 10 × 52 = $6,500. This $6,500 would be your deduction amount, saving you roughly $1,430 in federal income tax if you're in the 22% bracket.

If your overtime rate varies throughout the year (for instance, you received a raise mid-year or work different shifts at different rates), calculate the premium for each period separately and sum the totals.

Tips + Overtime: How the Combined $25,000 Cap Works

The OBBBA created separate deductions for tip income (up to $25,000) and overtime premium pay (up to $12,500), but these two deductions share a combined cap of $25,000. If you are a worker who earns both tips and overtime, your total deduction across both categories cannot exceed $25,000 in a single tax year.

In practice, the tip deduction is applied first. If you claim $20,000 in tip income as a deduction, you can only deduct $5,000 of overtime premium pay — even if your actual overtime premium was higher. Conversely, if you don't earn tips at all, your overtime deduction is capped at its standalone limit of $12,500.

This combined cap primarily affects workers in industries like restaurants and hospitality where both tips and overtime are common. A restaurant server who earns $18,000 in tips and also works 200 hours of overtime at $15/hr base (premium of $7.50 × 200 = $1,500) would deduct the full $18,000 in tips plus the full $1,500 in overtime premium, totaling $19,500 — well within the $25,000 combined cap.

How to Claim the Overtime Deduction

The overtime deduction is claimed on the new Schedule 1-A, which was introduced by the OBBBA for its above-the-line deductions. You do not need to itemize to claim it. The deduction flows through to your Form 1040, reducing your adjusted gross income before the standard deduction or itemized deductions are applied.

To claim the deduction, you need to calculate your overtime premium pay yourself. Keep all pay stubs for the tax year as documentation. Your employer is not required to provide a separate breakdown of overtime premium pay, so your pay stubs are your primary evidence. If you use time-tracking software or have access to your employer's payroll portal, download or print records showing your overtime hours and rates.

Most major tax software programs have been updated to include Schedule 1-A and will walk you through the overtime deduction calculation. If you file manually, you will need to complete Schedule 1-A and attach it to your return. The IRS has published instructions specific to the overtime deduction calculation, including worksheets for workers with variable overtime rates.

If you receive overtime pay from multiple employers, you can combine the premium pay from all jobs when calculating your deduction, but the $12,500 cap applies to your total across all employers. Workers who also adjust their W-4 withholding to account for the deduction should use the No Tax on Overtime Calculator to estimate their annual savings before making changes.

Frequently Asked Questions

Does the overtime deduction apply to salaried workers?

Generally no. The deduction targets workers covered by FLSA overtime rules, which primarily means hourly, non-exempt employees. Most salaried exempt workers do not receive overtime pay and therefore cannot claim this deduction. However, salaried non-exempt workers who receive overtime pay at 1.5x their effective hourly rate may qualify. Check your employment classification to confirm whether you are exempt or non-exempt.

Is double-time pay also deductible?

Yes. The deduction covers the premium portion of any overtime pay above your regular rate. For double-time, the premium is the full extra amount above your base rate. If your regular rate is $20/hr and you earn $40/hr for double-time, the deductible premium is $20 per hour for each double-time hour worked, subject to the $12,500 annual cap. Some states require double-time for certain hours (like California for hours beyond 12 in a day), and this premium qualifies.

Do I pay FICA on overtime even with the deduction?

Yes. The overtime deduction only reduces your federal income tax liability. You still owe Social Security tax (6.2%) and Medicare tax (1.45%) on all overtime earnings, including the premium portion. Your employer also continues to pay their matching share of FICA on your overtime wages. The deduction does not affect state income tax either, though some states may enact their own overtime deduction provisions.

Does my employer need to change how they report overtime?

No. Employers are not required to separately report overtime premium pay on your W-2. Box 1 of your W-2 will continue to show your total wages, including all overtime earnings, without any breakdown. You are responsible for calculating your overtime premium using your pay stubs and claiming the deduction on Schedule 1-A. Keep detailed records of your overtime hours and rates throughout the year.

Can I claim both overtime and tip deductions?

Yes, but the combined deduction for tips and overtime premium pay is capped at $25,000. The tip deduction has its own standalone cap of $25,000, and the overtime deduction is capped at $12,500, but the two together cannot exceed $25,000 total. If you deduct $20,000 in tips, only $5,000 of overtime premium is deductible. Plan your deductions strategically, and use the New Tax Law Calculator to model different scenarios.