What "no tax on overtime" actually does
The slogan oversells it. Under the 2025 law, overtime pay is still ordinary taxable wages. What you get is a new federal income tax deduction of up to $12,500 per year ($25,000 for married filing jointly) for "qualified overtime compensation", available for tax years 2025 through 2028. You can claim it whether or not you itemize.
Three things the law does not do:
- It does not make your whole overtime check tax-free. Only the FLSA premium portion (the extra "half" of time-and-a-half) counts toward the deduction.
- It does not touch payroll taxes. Social Security (6.2%) and Medicare (1.45%) still apply to all overtime pay.
- It does not automatically change state income tax. The deduction is federal; most states tax overtime exactly as before.
So the honest framing is: a capped federal income tax deduction on part of your overtime, for four tax years. Real money, but nothing like a 0% rate. To see what overtime actually adds to your check before and after taxes, run your numbers through the overtime pay calculator.
The caps and the income phase-out
The deduction is capped at $12,500 per year for single filers and $25,000 for married couples filing jointly. At a $15/hr premium (a $30 regular rate), a single filer would need more than 833 FLSA overtime hours in a year, about 16 hours every single week, before hitting the cap. Most workers never will.
Above $150,000 of modified adjusted gross income ($300,000 for joint filers), the deduction shrinks by $100 for every $1,000 of MAGI over the threshold. That means it disappears completely at $275,000 MAGI for a single filer with the full $12,500 deduction, and at $550,000 for a joint filer with the full $25,000. Smaller deductions phase out sooner: a single filer with a $5,000 deduction loses the last dollar at $200,000 MAGI.
| Parameter | Single | Married filing jointly |
|---|---|---|
| Maximum deduction | $12,500 | $25,000 |
| Phase-out begins (MAGI) | $150,000 | $300,000 |
| Reduction rate | $100 per $1,000 over | $100 per $1,000 over |
| Fully phased out (at max deduction) | $275,000 | $550,000 |
| Tax years | 2025 through 2028 | 2025 through 2028 |
Note that MAGI counts all your income, not just wages, so investment income or a spouse's salary can push you into the phase-out even if your own overtime is modest.
Worked example: $30/hr with 10 overtime hours a week
Take an hourly worker earning $30/hr who averages 10 FLSA overtime hours a week for 50 weeks (500 overtime hours for the year). Overtime pays time-and-a-half, $45/hr, so total overtime earnings are $22,500.
| Line | Amount |
|---|---|
| Total overtime pay (500 hrs at $45/hr) | $22,500 |
| Base portion, already-normal pay (500 hrs at $30/hr) | $15,000 |
| Deductible FLSA premium (500 hrs at $15/hr) | $7,500 |
| Federal income tax saved (22% bracket) | $1,650 |
| FICA still paid on all overtime (7.65%) | $1,721 |
The deduction covers $7,500 of the $22,500 in overtime pay, exactly one third. In the 22% bracket that is worth about $1,650 in federal income tax, roughly 7.3 cents per overtime dollar earned. Meanwhile FICA quietly takes $1,721 from the same overtime, more than the deduction saves. That is the gap between the slogan and the statute. Check where your own income lands the savings with the federal income tax calculator.
Your paycheck does not change; your refund does
This is the part that surprises people most: overtime withholding continues as normal. Employers keep withholding federal income tax, state tax, and FICA from overtime checks exactly as before. The deduction is claimed on your tax return, on the new Schedule 1-A attached to Form 1040, so the benefit shows up as a larger refund (or smaller balance due) at filing time, not as a fatter Friday paycheck.
In fact, overtime-heavy paychecks can still feel over-taxed in the moment, because percentage-method withholding treats a big week as if you earn that much every week. That was true before the 2025 law and remains true after it. The paycheck calculator shows the per-check withholding math, and the take-home pay calculator shows the full-year picture once the deduction is factored in.
One planning note: because the deduction reduces taxable income rather than payroll tax, its value equals your marginal rate times the premium. A worker in the 12% bracket saves 12 cents per premium dollar; a worker in the 24% bracket saves 24 cents, until the MAGI phase-out claws it back.
How qualified overtime shows up on your W-2
For tax year 2025, the IRS treated reporting as a transition: employers were not required to break out qualified overtime on the W-2, though many showed it in Box 14 or on a separate statement. If yours did not, the IRS allows you to use a reasonable method (pay stubs, employer records) to figure your FLSA premium total for the year.
Starting with 2026 W-2s, employers must report the year's total qualified overtime compensation in a dedicated field, so the number you claim on Schedule 1-A should match your W-2 directly.
- Keep your final pay stub of the year: it usually shows year-to-date overtime hours and earnings.
- Remember the number you need is the premium only. If your stub shows total time-and-a-half overtime pay, divide by 3 to get the FLSA premium.
- If you worked for multiple employers, add the qualified amounts together; the cap applies per return, not per job.
State income taxes still apply (in most states)
The deduction lives in the federal tax code. Whether your state honors it depends on how that state links to federal law, and most states continue to tax overtime in full. States that start from federal AGI generally do not inherit this deduction (it is claimed after AGI), and several states have explicitly decoupled from it.
A few states have gone the other way with their own overtime breaks (Alabama, for instance, ran its own overtime exemption from state wage tax), but those are separate state laws with their own rules and expiration dates, not the federal deduction. Check your state's current guidance before assuming any state-level savings.
Practical takeaway: when you estimate the value of the federal deduction, apply it to your federal marginal rate only. Your state's take from overtime is unchanged unless your state passed its own law.
Fine print: eligibility rules and the 2028 sunset
Beyond the caps and phase-out, a few technical requirements decide whether you can claim it at all:
- You need a work-eligible Social Security number on the return, and if you are married, you must file jointly to claim the deduction. Married filing separately is excluded.
- You do not need to itemize. The deduction stacks on top of the standard deduction, which is what makes it valuable to typical hourly workers.
- It reduces income tax only. It does not reduce self-employment tax, FICA, or state tax, and it does not change your MAGI for other benefit calculations.
- It expires after tax year 2028 unless Congress extends it. Plans that count on the deduction long-term (say, structuring compensation around overtime) carry legislative risk.
If overtime is a regular part of your income, the right move is to model a full year: hours, premium, marginal bracket, and the deduction's cap. The overtime pay calculator does the gross math, and pairing it with your bracket gives the true after-tax value of each extra shift.