No tax on overtime: the premium-pay deduction explained
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The 2025 tax law created a federal deduction for overtime pay. It does not cover all of your overtime. It covers only the premium part: the extra half you earn on top of your regular rate when you are paid time and a half. The deduction is for tax years 2025 through 2028.
What counts as qualified overtime
Qualified overtime is overtime that the Fair Labor Standards Act (FLSA) requires your employer to pay. Under the FLSA, non-exempt workers get at least 1.5 times their regular rate for hours over 40 in a workweek.
Only the amount above your regular rate counts. If you earn $28 an hour, overtime pays $42 an hour. The deductible part is $14 an hour, not $42.
These do not count:
- Overtime that your employer pays by choice or under a union contract, if the FLSA does not require it. Daily overtime under a state law is one example.
- The regular-rate part of each overtime hour.
- Pay for exempt employees, such as most salaried managers, because the FLSA does not require overtime for them.
How much you can deduct
The cap is $12,500 a year, or $25,000 on a joint return. The cap goes down by $100 for each full $1,000 of modified adjusted gross income above $150,000, or $300,000 on a joint return. This is the same phase-out as the tips deduction.
Example
Maria earns $28 an hour and works 300 hours of overtime in 2026. Her overtime pay is $12,600. The premium part is 300 × $14 = $4,200. Her MAGI is $70,000, so there is no phase-out. She deducts $4,200. In the 22% bracket, she saves about $924 in federal income tax.
How to claim it
- Find the qualified overtime amount. Employers must report it separately on Form W-2. For 2025, the IRS allowed workers to use pay stubs or other records if the W-2 did not show it.
- Enter the amount on Schedule 1-A of Form 1040.
- Include your Social Security number. If you are married, file jointly.
Common questions
Is all of my overtime pay tax-free?
No. Only the premium half above your regular rate can be deducted, and only up to $12,500, or $25,000 on a joint return.
Does the overtime deduction lower Social Security tax?
No. Social Security and Medicare tax still apply to all overtime pay. The deduction lowers federal income tax only.
Can salaried workers claim the overtime deduction?
Only if they are non-exempt under the FLSA and their employer must pay them overtime. Most exempt salaried employees do not get FLSA overtime, so they cannot claim it.
Does state-required daily overtime count?
No. The deduction is limited to overtime required by section 7 of the FLSA, which is based on hours over 40 in a workweek.
Can I claim both the tips and overtime deductions?
Yes. If you earn both, you can take both deductions, each with its own cap.
Updated: November 1, 2026. Based on 26 U.S. Code § 225 and IRS guidance on the 2025 tax law.