How the No-Tax-on-Overtime Deduction Works
The overtime deduction is one of the headline tax provisions of the One Big Beautiful Bill Act (OBBBA), signed into law in July 2025. For the first time, workers who earn overtime premium pay can deduct up to $12,500 of that premium from their federal taxable income. The deduction applies to tax years 2025 through 2028, giving workers four years of relief on overtime earnings. This means if you work extra hours and earn time-and-a-half, the “extra half” portion — the overtime premium — can be deducted from your taxable income up to the $12,500 cap.
The deduction reduces only federal income tax. FICA payroll taxes (Social Security at 6.2% and Medicare at 1.45%) still apply to all overtime earnings. For a worker in the 22% federal bracket deducting the full $12,500, the federal income tax savings would be approximately $2,750 per year. Workers in higher brackets save proportionally more. The deduction phases out for higher earners — it begins reducing above $150,000 MAGI for single filers ($250,000 MFJ), decreasing by $1 for every $2 of income above the threshold until fully phased out.
How to Calculate Your Overtime Pay for This Deduction
One of the most common questions about the overtime deduction is how to determine the qualifying amount, since your W-2 does not separate overtime premium from regular pay. The deductible portion is only the premium — the amount above your regular hourly rate. Under the Fair Labor Standards Act, overtime is typically paid at 1.5 times the regular rate for hours worked beyond 40 in a workweek. The premium is the extra 0.5 times your regular rate multiplied by overtime hours.
For example, if you earn $30 per hour and worked 400 overtime hours during the year, your overtime premium is $15/hour × 400 hours = $6,000. That $6,000 is the amount you can deduct (well under the $12,500 cap). To substantiate your deduction, keep your pay stubs, time sheets, or employer records showing regular and overtime hours. The IRS may require documentation if your return is selected for review. If your employer provides an overtime earnings breakdown on your final pay stub, that can serve as supporting documentation.
Who Qualifies for the Overtime Deduction?
The deduction is available to workers covered under the Fair Labor Standards Act (FLSA) or equivalent state overtime laws who actually receive overtime premium pay. This includes hourly workers in manufacturing, construction, healthcare, retail, food service, transportation, and most other industries. Non-exempt salaried employees who earn overtime pay also qualify. Exempt employees — typically salaried professionals, executives, and administrators earning above the FLSA salary threshold — who do not receive overtime pay are not eligible, since they have no overtime premium to deduct.
Income limits apply. The deduction begins phasing out at $150,000 in modified adjusted gross income for single filers and $250,000 for married filing jointly. For every $2 of income above the threshold, the deduction decreases by $1. This means a single filer earning $175,000 would see the deduction reduced by $12,500 and receive no benefit. The phaseout ensures the deduction primarily benefits middle-income workers.
Overtime vs. Tips Deduction: How They Interact
Both the tips deduction (up to $25,000) and the overtime deduction (up to $12,500) were created by the OBBBA, and workers can claim both if they qualify. However, the combined total of the two deductions cannot exceed $25,000. This means a restaurant server who earns $20,000 in tips and $8,000 in overtime premium can only deduct $25,000 total — not $28,000. Workers who earn both types of income should determine which combination of deductions maximizes their total savings.
In most cases, prioritizing the tips deduction is more beneficial because its cap is higher. But workers with modest tips and significant overtime may benefit from splitting the deduction differently. The calculator on this page estimates savings from the overtime deduction alone. Use our No Tax on Tips Calculator to estimate tip deduction savings separately, then consider the combined cap when filing.
State Tax Implications
The federal overtime deduction only reduces federal income tax. State tax treatment depends on whether your state conforms to the federal definition of adjusted gross income. States that automatically adopt federal AGI adjustments will pass the overtime deduction through to the state return, reducing state tax as well. States that decouple from federal definitions may require separate legislation to offer a matching deduction. Nine states have no income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. Workers in those states are unaffected at the state level. The calculator includes a state estimate using a flat-rate approximation based on your state's top marginal rate, providing a rough sense of potential combined savings.