What counts as qualified overtime
The deduction in the 2025 tax law covers only the premium part of overtime required by the Fair Labor Standards Act: the extra half in time and a half, for hours over 40 in a workweek. At $25.00 an hour, an overtime hour pays $37.50; the qualified part is $12.50. Overtime your employer pays by contract or by state law beyond the federal rule does not count, and nor does the regular rate for the hours themselves.
The deduction is capped at $12,500 a year ($25,000 filing jointly) and shrinks once modified adjusted gross income passes $150,000 ($300,000 jointly), losing $100 for each $1,000 over. You take it on Schedule 1-A whether or not you itemize, and you need a Social Security number and, if married, a joint return.
A worked example
A single worker in Texas earns $25.00 an hour and works 50 hours a week, spread over 5 days, for 50 weeks. Overtime pay is $375 a week, of which the federal premium is $125. Over the year the qualified overtime is $6,250 and the deduction is $6,250. At tax time it cuts federal tax by $975, about $37.50 for each of the 26 paychecks.
Higher earners hit the cap. At $60.00 an hour and 60 hours a week, the premium for the year is $30,000, but after the cap and the income phase-out the deduction is $6,500 and the saving is $1,560.
Daily overtime does not qualify
States such as California pay overtime by the day. Four ten-hour days at $25.00 an hour earn $100 of California overtime premium a week, but the week is only 40 hours, so the federal premium is $0 and the deduction saves $0. The calculator shows the state premium separately so you can see what is paid but not deductible.
What the deduction does not change
Social Security and Medicare are still withheld on every overtime dollar, at $28.69 a week in the example, and the overtime still counts toward your Social Security earnings record. State income tax is usually unchanged, because most states start from federal adjusted gross income and the overtime deduction comes after that line. Your W-2 shows qualified overtime separately for 2026, which is the figure to use on Schedule 1-A.
The deduction also does not depend on how the week is paid. Overtime paid weekly, every two weeks or in a later catch-up check all counts, as long as it was for hours over 40 in a workweek and paid at the federal rate.
What the inputs mean
- Hourly rate: your regular rate. Shift pay and some bonuses can raise the regular rate for overtime; use the rate your employer uses.
- Hours a week and days: a typical week, so state daily rules can be applied.
- Weeks: how many weeks a year look like that.
- Other income and filing status: these set the phase-out and the tax rate the deduction saves at.
Common mistakes
- Deducting all overtime pay. Only the premium counts, so the deduction is a third of time-and-a-half pay at most.
- Expecting a bigger paycheck right away. Withholding does not change unless you file a new W-4.
- Assuming the state follows. Most states tax overtime as ordinary wages.
No tax on overtime questions
Is overtime now tax-free?
Not entirely. From 2025 to 2028 a federal deduction covers the extra half of time-and-a-half pay (the premium), up to $12,500 a year, or $25,000 on a joint return. The regular rate for those hours is still taxed, Social Security and Medicare still apply, and most states tax it in full.
Will my paycheck go up?
Not automatically. Payroll keeps withholding as before, and the saving comes when you file. In the example on this page it is $975 for the year. You can claim it during the year instead by entering the expected deduction in Step 4(b) of a new W-4, which lowers federal withholding from $242.12 to $204.62 a paycheck.
Do salaried workers get the overtime deduction?
Only if they are non-exempt under the Fair Labor Standards Act and are paid time and a half for hours over the weekly limit. Exempt salaried staff are not owed federal overtime, so nothing they receive for extra hours qualifies, even if their employer pays a bonus for it.
Can married couples filing separately take it?
No. The deduction is not available on a married filing separately return, so the same overtime saves $0 in that status.
Sources
Rules checked . How we calculate.