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Tax Year 2026Updated July 13, 2026

No Tax on Overtime Calculator 2026: OBBBA Deduction Estimator

The One Big Beautiful Bill Act (OBBBA), signed into law in 2025, created a new above-the-line federal income tax deduction for qualified overtime premium pay, effective for tax years 2025 through 2028. Non-exempt (hourly) employees can deduct the premium portion of their overtime wages, up to $12,500 per year for single and head-of-household filers, or $25,000 for married filing jointly. The deduction phases out for higher earners above $150,000 MAGI (single) or $300,000 (MFJ). Note: FICA taxes still apply to all overtime wages, Social Security (6.2%) and Medicare (1.45%) are not reduced by this deduction.

How the Overtime Deduction Works

Under IRC §225, the overtime deduction applies only to the premium portion of overtime pay, not the full overtime wage. For time-and-a-half (1.5×), only the extra 0.5× above your regular rate qualifies. For double-time (2.0×), the 1.0× premium qualifies.

Annual Caps

  • Single / Head of Household: $12,500 per year
  • Married Filing Jointly: $25,000 per year
  • Married Filing Separately: Not eligible. MFS filers are excluded entirely under IRC §225

MAGI Phase-Out

The deduction cap is reduced by 10% of MAGI exceeding the threshold. For single and head-of-household filers, the threshold is $150,000. For MFJ filers, it is $300,000. This means for every $1,000 of MAGI above the threshold, the cap drops by $100. The deduction is fully eliminated at $275,000 (single/HoH) or $550,000 (MFJ).

FICA Still Applies

This deduction reduces federal income tax only. FICA taxes (Social Security at 6.2% and Medicare at 1.45%) continue to apply to all overtime wages, including the premium portion. State income taxes may also still apply unless your state has adopted OBBBA conformity.

Worked Examples

Example 1: Warehouse Worker, No Phase-Out

Profile: $25/hr regular rate, 280 overtime hours at 1.5×, single filer, MAGI $60,000

Premium rate = $25.00 × (1.5 − 1.0) = $12.50/hr
Total overtime premium = $12.50 × 280 = $3,500.00
MAGI $60,000 < threshold $150,000, no phase-out
Effective cap = $12,500
Deduction = $3,500.00

Example 2: Nurse, Partial Phase-Out

Profile: $30/hr regular rate, 500 overtime hours at 1.5×, single filer, MAGI $175,000

Premium rate = $30.00 × (1.5 − 1.0) = $15.00/hr
Total overtime premium = $15.00 × 500 = $7,500.00
MAGI excess = $175,000 − $150,000 = $25,000
Phase-out reduction = $25,000 × 10% = $2,500.00
Effective cap = $12,500 − $2,500.00 = $10,000.00
Deduction = $7,500.00 (capped at effective cap)

Example 3: MFJ Worker, Full Cap Available

Profile: $22/hr regular rate, 400 overtime hours at 1.5×, married filing jointly, MAGI $250,000

Premium rate = $22.00 × (1.5 − 1.0) = $11.00/hr
Total overtime premium = $11.00 × 400 = $4,400.00
MAGI $250,000 < MFJ threshold $300,000, no phase-out
Effective cap = $25,000
Deduction = $4,400.00

Does Your State Tax Overtime?

The federal overtime deduction reduces your IRS tax bill, but state treatment varies. See our complete tracker:

State Tips & Overtime Tax Map: All 51 Jurisdictions ›

Occupation-specific guides: Truck Drivers | Union Workers | Railroad Workers | Firefighters

Frequently Asked Questions

What counts as qualified overtime for the deduction?
Only the premium portion of overtime pay qualifies - not your total overtime wages. For time-and-a-half, that's the extra 0.5× above your regular rate. For example, if your regular rate is $25/hr, your time-and-a-half rate is $37.50/hr, but only the $12.50/hr premium is deductible. The overtime must be FLSA-required (or equivalent state law). Salaried-exempt employees and self-employed individuals are not eligible.
Does the overtime deduction eliminate all taxes on overtime pay?
No. The deduction removes federal income tax only on the overtime premium, up to the annual cap. FICA taxes (Social Security at 6.2% and Medicare at 1.45%) still apply to all overtime wages. State income taxes may also still apply depending on whether your state conforms to the OBBBA.
What is the annual cap on the overtime deduction?
For 2026, the cap is $12,500 for single filers and head of household, and $25,000 for married filing jointly. Married filing separately filers are not eligible for this deduction at all.
How does the MAGI phase-out work?
The deduction phases out at 10% of Modified Adjusted Gross Income (MAGI) above the threshold. For single/HoH filers, the threshold is $150,000. For MFJ, it's $300,000. For every $1,000 above the threshold, the cap is reduced by $100. The deduction is fully phased out at $275,000 (single) or $550,000 (MFJ).
How do I claim the overtime deduction on my tax return?
Starting in tax year 2026, your employer reports qualified overtime on your W-2 using Box 12, Code TT. You claim the deduction on Schedule 1-A (new OBBBA deductions schedule). It's an above-the-line deduction, so you can claim it even if you take the standard deduction.
Can I claim both the overtime and tips deductions?
Yes, if you qualify for both. They are separate deductions with separate caps. However, the same MAGI phase-out applies to both. Use the combined Schedule 1-A to claim all OBBBA deductions together.
Who is NOT eligible for the overtime deduction?
Three groups are excluded: (1) Married filing separately filers are completely ineligible under IRC §225. (2) Salaried-exempt employees who are not entitled to FLSA overtime. (3) Self-employed individuals - the deduction only applies to W-2 employees with FLSA-qualified overtime.

Overtime Deduction Calculator

Your Overtime Deduction$3,500

Your estimated overtime deduction is $3,500 — saving you approximately $770 in federal income tax.

LineValue
Overtime premium (deductible portion)$3,500.00
Annual cap (your filing status)$12,500
MAGI phase-out reduction$0.00
Effective cap after phase-out$12,500
Your deduction$3,500
Note: FICA still appliesSS + Medicare on full OT wages