No Tax on Overtime: Complete 2026 Guide
The One Big Beautiful Bill Act (OBBBA) created a new above-the-line deduction for overtime pay under IRC Section 225. Starting in tax year 2025, qualifying workers can deduct up to $$12,500 (single) or $$25,000 (Married Filing Jointly) in overtime premium from their federal income tax. This guide covers every aspect of the deduction: eligibility, the premium-only rule, deduction caps, the MAGI phase-out, W-2 reporting, and how to claim it on your return.
What is the no tax on overtime law?
IRC Section 225, enacted as part of the OBBBA, provides an above-the-line deduction for qualified overtime compensation. "Above the line" means you can claim this deduction whether you take the standard deduction ($$16,100 for single filers in 2026) or itemize. It directly reduces your adjusted gross income (AGI).
The deduction applies to the premium portion of overtime pay only. For time-and-a-half, that is the 0.5x above your regular hourly rate. The base-rate portion of overtime hours remains fully taxable.
This is an income tax deduction, not a payroll tax exemption. Social Security tax (6.2%) and Medicare tax (1.5%) still apply to all overtime wages.
Who qualifies? (FLSA non-exempt only)
To claim the deduction, you must meet all of these requirements:
- Non-exempt status: You must be classified as non-exempt under the Fair Labor Standards Act (FLSA) or an equivalent state overtime law.
- Statutory overtime: Your overtime pay must be required by FLSA or state law. Voluntarily paid overtime premiums by employers who are not legally required to pay them generally do not qualify.
- Employee status: Independent contractors, freelancers, and self-employed individuals are not eligible.
- Filing status: You must file as Single, Head of Household, or Married Filing Jointly. Married Filing Separately filers are excluded.
Common qualifying occupations include hourly manufacturing workers, construction laborers, healthcare hourly staff (nurses' aides, techs), retail and food-service hourly employees, and warehouse and logistics workers. For a detailed breakdown, see Who Qualifies for No Tax on Overtime?.
Only the premium portion is deductible
This is the most commonly misunderstood part of the law. The deduction does not cover your total overtime pay. It covers only the overtime premium, which is the amount above your regular hourly rate.
Example 1: Time-and-a-half
- Regular hourly rate: $25.00/hr
- Time-and-a-half rate: $37.50/hr
- Premium per hour: $37.50 − $25.00 = $12.50/hr
- 200 overtime hours worked in 2026
- Total overtime pay: $37.50 × 200 = $7,500
- Deductible premium: $12.50 × 200 = $2,500
Only the $2,500 premium portion is deductible, not the full $7,500 in overtime wages.
Example 2: Double-time
- Regular hourly rate: $25.00/hr
- Double-time rate: $50.00/hr
- Premium per hour: $50.00 − $25.00 = $25.00/hr
- 100 double-time hours worked in 2026
- Total overtime pay: $50.00 × 100 = $5,000
- Deductible premium: $25.00 × 100 = $2,500
Double-time yields a larger per-hour premium ($25.00 vs. $12.50 for time-and-a-half), so fewer double-time hours are needed to reach the deduction cap.
For a detailed explanation, see Only the Overtime Premium Is Deductible.
Deduction caps by filing status
The overtime deduction is capped at a fixed dollar amount per tax year, depending on your filing status:
| Filing Status | Maximum Deduction |
|---|---|
| Single | $12,500 |
| Head of Household | $12,500 |
| Married Filing Jointly | $25,000 |
| Married Filing Separately | Not eligible |
At the 22.0% marginal bracket, a single filer who maxes out the deduction saves up to $2,750 in federal income tax. A joint filer can save up to $5,500 at the same bracket. Your actual savings depend on your marginal rate.
The MAGI phase-out
Higher-income taxpayers see their deduction cap reduced. The phase-out works as follows:
- Threshold: $150,000 MAGI for single/HoH filers;$300,000 for MFJ filers.
- Reduction rate: For every $1,000 of MAGI above the threshold, the cap drops by $100 (10.0% of the excess).
- Full phase-out (single): At MAGI of $275,000, the entire $12,500 deduction is eliminated.
- Full phase-out (MFJ): At MAGI of $550,000, the entire $25,000 deduction is eliminated.
Example 3: Partial phase-out
- Filing status: Single
- MAGI: $175,000
- Excess over threshold: $175,000 − $150,000 = $25,000
- Reduction: $25,000 × 10.0% = $2,500
- Reduced cap: $12,500 − $2,500 = $10,000
This filer can deduct up to $10,000 in qualifying overtime premium instead of the full $12,500.
Use the OBBBA Phase-Out Calculator to find your reduced cap based on your MAGI.
How to claim on Schedule 1-A
The overtime deduction is claimed on Schedule 1-A, a new IRS form introduced for OBBBA deductions. Here is the process:
- Your employer reports your qualified overtime compensation in W-2 Box 12 using Code TT.
- You enter the Code TT amount on Schedule 1-A, Line 2 (Qualified Overtime Compensation).
- The form applies the deduction cap and any MAGI-based phase-out reduction.
- The resulting deduction flows to Schedule 1, then to Form 1040 Line 10, reducing your AGI.
For a step-by-step walkthrough, try the Schedule 1-A Deduction Calculator.
W-2 Code TT reporting
Starting in TY 2026, employers are required to use Box 12 Code TT to report the dollar amount of qualified overtime premium paid during the tax year. This code specifically captures the premium portion only, not total overtime wages.
If your employer has not yet added Code TT to your W-2, ask your payroll department. For tax year 2025, transitional relief allowed employers to use Box 14 or other methods (IRS Notice 2025-69), but Code TT is mandatory from TY 2026 forward.
Does the deduction reduce FICA?
No. The Section 225 deduction reduces your federal income tax only. You still owe Social Security tax at 6.2% (on wages up to the $184,500 wage base) and Medicare tax at 1.5% on all overtime earnings, including the premium.
This is because the overtime deduction is an above-the-line income tax deduction that reduces AGI. It does not change your employment tax base. FICA is calculated on gross wages before any income tax deductions. For more detail, see Does No Tax on Overtime Reduce FICA?.
Married Filing Separately exclusion
IRC Section 225 explicitly bars Married Filing Separately (MFS) filers from claiming the overtime deduction. The deduction amount for MFS is zero, with no exceptions or workarounds.
If you are married and want to claim the overtime deduction, you must file a joint return. Couples considering MFS for other tax reasons (such as income-driven student loan repayment plans) should weigh the loss of this deduction against any MFS benefits.
When does it expire?
The IRC Section 225 overtime deduction is available for tax years 2025 through 2028. It applies to overtime pay earned on or after January 1, 2025 and on or before December 31, 2028. Unless Congress passes new legislation to extend the provision, the deduction will not be available starting in tax year 2029.
For 2026, you can calculate your potential savings now using the No Tax on Overtime Calculator or the Overtime Pay Calculator.