Overtime Premium
Tax Glossary Term
Definition
The overtime premium is the extra amount paid above your regular hourly rate for overtime hours. Under the Fair Labor Standards Act, non-exempt employees must receive at least 1.5 times their regular rate for hours worked beyond 40 in a workweek. The 'premium' is specifically the additional 0.5x portion, not the full overtime rate. This distinction matters for the new IRC Section 225 deduction under the OBBBA. The deduction only applies to the premium portion, not the base pay earned during overtime hours. So if your regular rate is $25 per hour and you earn $37.50 per hour for overtime, the deductible premium is $12.50 per hour (the extra half). The deduction is capped at $25,000 per year ($12,500 for single/HoH) and is reported on the new Schedule 1-A as an above-the-line deduction. Like the tips deduction, it phases out for MAGI above $150,000 (single) or $300,000 (MFJ) at a rate of 10.0% of the excess. The overtime deduction only reduces federal income tax — FICA is still owed on the full overtime pay. Your employer reports the qualifying overtime premium on your W-2 with Code OT in Box 12. Only hours that are overtime under federal or state law qualify. Voluntary extra shifts at regular pay do not count.
Example
Regular rate: $25/hr
Overtime rate (1.5x): $37.50/hr
Overtime premium per hour: $37.50 - $25.00 = $12.50
200 OT hours x $12.50 = $2,500 deduction
Tax savings at 22.0% bracket: $550