Overtime / Who qualifies
26 U.S.C. § 225 · tax years 2025–2028
Is overtime tax-free? Not quite. Here is what is deductible.
Overtime is still taxed when it is paid. What changed is a new deduction, for 2025 through 2028, for the part of overtime the Fair Labor Standards Act requires above your regular rate. That is the “half” in time-and-a-half, capped at $12,500 a year ($25,000 joint).
Calculate your overtime deduction
Checklist: do you qualify?
- FLSA overtime-eligible. You are covered by the FLSA and not exempt from its overtime rule. Federal employees can check block 35 of their SF-50: “N” means nonexempt.
- The FLSA required the overtime. Generally, hours over 40 in a workweek. Daily overtime, weekend premiums, or overtime paid only under state law or a union contract does not count, unless the FLSA also required it.
- It is reported. For 2026 onward, on Form W-2 box 12 code TT (what the codes mean). For 2025, Notice 2025-69 lets you use pay statements.
- Valid SSN (valid for employment, issued before the return’s due date) on the return.
- Married? File jointly. Married filing separately cannot claim it.
How much counts
| Situation | Qualified overtime |
|---|---|
| 10 hours over 40 at a $20 regular rate, paid time-and-a-half ($300 of overtime pay) | $100 (10 × $20 × ½) |
| Same 10 hours, employer pays double time ($400) | Still $100. Only the FLSA-required premium counts (IRS FS-2026-13, Q16). |
| 2025 pay stub shows $15,000 total time-and-a-half overtime | $5,000 (÷ 3, Notice 2025-69) |
| 2025 pay stub shows $20,000 of double-time overtime | $5,000 (÷ 4, Notice 2025-69) |
| Public-sector comp time at 1.5 hours per overtime hour, $4,500 paid as wages | $1,500 (one-third) |
Hospital, residential-care, police, and fire schedules can use alternative FLSA overtime methods. The IRS says the premium actually paid under that method is what counts.
Cap and income phaseout
- Cap: $12,500 per return, $25,000 on a joint return.
- Phaseout: $100 less for each whole $1,000 of MAGI over $150,000 ($300,000 joint). Head of household uses $150,000.
- Example: single, $8,000 of qualified overtime, MAGI $172,400. 22 whole thousands over → $2,200 off → $5,800.
Commonly exempt from FLSA overtime
These workers are usually FLSA overtime-ineligible, so overtime they receive is not qualified overtime, even if another law or contract pays it:
- Executive, administrative, and professional employees, including teachers
- Outside sales employees and certain commissioned retail or service employees
- Certain computer-related employees
- Employees of railroads and air carriers, taxi drivers, certain motor-carrier employees, and seamen on American vessels
- Certain seasonal amusement and agricultural employees
- An employee who owns at least a bona fide 20% stake and actively manages the business
Whether an exemption applies is a fact-specific Department of Labor question. The list above summarizes IRS FS-2026-13, Q4–Q5.
How you claim it
Enter qualified overtime on Schedule 1-A, Part III (line 14a for W-2 overtime on the 2025 form). Line 15 applies the cap, lines 16–20 the phaseout, and line 21 is the deduction. Tips are a separate deduction with their own rules and $25,000 cap, and qualified overtime does not include qualified tips.
Questions
Is overtime tax-free now?
Not exactly. Overtime is still wages: it is in Form W-2 box 1 and is still subject to income tax withholding and social security and Medicare tax. For tax years 2025 through 2028, eligible workers can deduct qualified overtime compensation, which is only the FLSA-required premium above the regular rate (the “half” of time-and-a-half), up to $12,500 or $25,000 on a joint return, on Schedule 1-A.
Who qualifies for the no tax on overtime deduction?
An individual who is covered by the Fair Labor Standards Act and not exempt from its overtime rule, who was paid overtime that section 7 of the FLSA required, has a Social Security number valid for employment, and, if married, files a joint return. Overtime paid only because of state law, a union contract, or employer policy is not qualified overtime.
How much of my overtime is deductible?
Only the premium. At time-and-a-half, it is one-third of total overtime pay: 10 overtime hours at a $30 regular rate pay $450, and $150 of that is qualified overtime. If an employer pays double time, still only the half-time premium the FLSA requires counts.
What is the income limit for the overtime deduction?
The deduction is reduced by $100 for each whole $1,000 of modified adjusted gross income over $150,000, or $300,000 on a joint return. Schedule 1-A drops any partial $1,000. A single filer claiming the full $12,500 loses it all at $275,000 of MAGI; a joint return claiming $25,000 loses it all at $550,000.
Are salaried employees eligible?
Usually not if they are exempt from FLSA overtime. The IRS lists common exemptions including executive, administrative, and professional employees (including teachers), outside sales employees, certain computer employees, certain commissioned retail employees, and employees of railroads and air carriers. A salaried worker who is not exempt and is paid FLSA overtime can qualify.
Do I need to itemize?
No. The IRS says the overtime deduction is available whether you itemize or take the standard deduction. You claim it in Part III of Schedule 1-A, and the total flows to Form 1040, line 13b.
Can I get the benefit in my paycheck instead of waiting for a refund?
Your employer may not reduce withholding on its own. You can give your employer a new Form W-4 that estimates the overtime deduction in step 4(b). The IRS Tax Withholding Estimator also accounts for it.