No Tax on Overtime: How the Federal Deduction Works
The law commonly called "No Tax on Overtime" (part of Public Law 119-21, signed July 4, 2025) created a temporary federal income tax deduction for qualified overtime compensation for 2025 through 2028. As the IRS describes it, the deduction covers only the premium part of overtime pay that the Fair Labor Standards Act requires, such as the "half" in time-and-a-half, up to $12,500 per year ($25,000 on a joint return), and it shrinks for higher incomes. It is claimed on Schedule 1-A of Form 1040. The IRS says overtime pay is still generally subject to Social Security, Medicare, and income tax withholding.
What the law says
- The IRS says the overtime deduction is part of the Working Families Tax Cuts law, signed July 4, 2025, as Public Law 119-21, and is effective for 2025 through 2028. IRS, Working Families Tax Cuts: Tax deductions for working Americans and seniors
- The deduction covers pay above the regular rate that the Fair Labor Standards Act (FLSA) requires, such as the "half" portion of time-and-a-half pay. IRS, Working Families Tax Cuts: Tax deductions for working Americans and seniors
- If an employer pays more than the FLSA requires, such as "double time," the IRS says only the amount minimally necessary to satisfy the FLSA counts as qualified overtime compensation. Extra overtime paid under a state law or a union contract does not count beyond the FLSA-required amount. IRS, FS-2026-13, Questions and answers about the deduction for qualified overtime compensation (August 2026)
- A worker who is not eligible for overtime under the FLSA (for example, because of an FLSA exemption) does not receive qualified overtime compensation, regardless of other laws or agreements that provide overtime pay. IRS, FS-2026-13, Questions and answers about the deduction for qualified overtime compensation (August 2026)
- The maximum annual deduction is $12,500, or $25,000 if you file jointly. It phases out if modified adjusted gross income is over $150,000, or $300,000 if you file jointly. IRS, What to know about the No Tax on Overtime deduction
- To claim it, you must have a Social Security number valid for employment, and if you are married you must file a joint return. If both spouses received qualified overtime, both must have valid Social Security numbers on the return. IRS, FS-2026-13, Questions and answers about the deduction for qualified overtime compensation (August 2026)
- The deduction is available whether you itemize or take the standard deduction. It is claimed in Part III of Schedule 1-A, which is attached to Form 1040, 1040-SR, or 1040-NR. IRS, Schedule 1-A, Additional Deductions: What to know about the new form
- For 2025, the IRS says employers weren't required to report qualified overtime separately on Forms W-2, 1099-NEC, and 1099-MISC; if you didn't get a statement showing the amount, the Schedule 1-A instructions explain how to figure it. IRS, What to know about the No Tax on Overtime deduction
- Starting in tax year 2026, employers must report qualified overtime separately, most commonly on Form W-2 in box 12 with code TT (or on Form 1099-MISC box 14 or Form 1099-NEC box 1d). IRS, FS-2026-13, Questions and answers about the deduction for qualified overtime compensation (August 2026)
- The IRS says the deduction does not make overtime exempt from gross income, and overtime is generally still treated as wages for employment taxes, including income tax withholding, Social Security, and federal unemployment taxes. IRS, FS-2026-13, Questions and answers about the deduction for qualified overtime compensation (August 2026)
FAQ
Is all of my overtime pay tax-free?
No. The IRS says the deduction covers only the FLSA-required premium above your regular rate (such as the "half" in time-and-a-half), up to the annual cap. It is a deduction from federal income tax.
Will my employer withhold less tax from my overtime?
Not automatically. The IRS says an employer may not reduce withholding for the deduction unless you give it an updated Form W-4; the 2026 Form W-4 lets you account for the deduction in step 4(b).
Do I still pay Social Security and Medicare on overtime?
The IRS says overtime compensation is generally not excluded from wages for employment taxes, including Social Security; the deduction is an income tax deduction.
Do I have to itemize to claim it?
No. The IRS says it is available whether you itemize or take the standard deduction.
Can I claim it if I'm married filing separately?
No. The IRS says married taxpayers must file jointly to claim the deduction.
What if my W-2 shows the wrong overtime amount?
The IRS says a substitute Form W-2 (Form 4852) cannot be used to determine the deductible amount; the amount must be on the statement the employer furnishes, such as the W-2 or a corrected W-2c.
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General legal information, not legal advice. Laws change and local rules can differ; check the linked official source or talk to a lawyer about your situation.