Only the Overtime Premium Is Deductible
The OBBBA overtime deduction (IRC Section 225) covers only the premium portion of overtime pay, not the total overtime wage. For time-and-a-half at $30/hr, only the $15/hr premium above the regular rate is deductible, not the full $45/hr. This distinction significantly affects how much you can actually deduct and the tax savings you receive.
What is the overtime premium?
The overtime premium is the extra pay above your regular hourly rate that compensates you for working overtime. When you work an overtime hour, your employer pays you your regular rate plus a premium. The premium is the "plus" portion.
IRC Section 225 defines "qualified overtime compensation" as the amount by which overtime pay exceeds the employee's regular rate for the same period. That means only the premium counts toward the deduction, subject to the annual cap of $12,500 for single filers or $25,000 for Married Filing Jointly.
Time-and-a-half calculation
Time-and-a-half (1.5x) is the most common overtime rate under FLSA. Here is how the premium breaks down:
- Regular rate: 1.0x
- Overtime rate: 1.5x
- Premium: 1.5x − 1.0x = 0.5x
For a worker earning $25/hr, the overtime rate is $37.50/hr, but the deductible premium is only $12.50/hr. Over a full year, if this worker logs 200 overtime hours, the total overtime pay is $7,500, yet the deductible portion is only $2,500.
Double-time calculation
Some employers and state laws (notably California for hours beyond 12 in a day) require double-time (2.0x):
- Regular rate: 1.0x
- Overtime rate: 2.0x
- Premium: 2.0x − 1.0x = 1.0x
For the same $25/hr worker, the double-time rate is $50.00/hr, and the deductible premium is the full $25.00/hr. Double-time hours generate twice the deductible premium per hour compared to time-and-a-half.
Worked example
Full-year overtime deduction calculation
- Regular hourly rate: $25.00/hr
- Overtime rate (1.5x): $37.50/hr
- Overtime hours worked in 2026: 200
- Total overtime pay: $37.50 × 200 = $7,500
- Premium per hour: $37.50 − $25.00 = $12.50
- Total qualifying premium: $12.50 × 200 = $2,500
- W-2 Box 12 Code TT: $2,500
- Tax savings at the 22.0% bracket: $2,500 × 22.0% = $550
Although total overtime wages were $7,500, only $2,500 qualifies for the deduction. The $550 in savings represents the income tax reduction at the 22.0% marginal rate. FICA taxes on the full $7,500 are unaffected.
To run your own numbers, use the No Tax on Overtime Calculator or the Overtime Pay Calculator.
How it shows up on your W-2 (Code TT)
Starting in TY 2026, employers must report the qualifying overtime premium in W-2 Box 12 using Code TT. This is the figure you enter on Schedule 1-A when claiming the deduction.
Important points about Code TT:
- It includes only the premium, not total overtime wages.
- It reflects the combined premium from all overtime rates (time-and-a-half, double-time, or any other rate above 1.0x).
- If the Code TT amount exceeds the annual cap ($12,500 single /$25,000 MFJ), Schedule 1-A limits your deduction to the cap.
- For tax year 2025, transitional relief applied (IRS Notice 2025-69), but Code TTis mandatory from TY 2026 onward.
If your W-2 does not include Code TT for 2026, contact your payroll department to request a corrected form (W-2C).