No Tax on Overtime — Key Facts at a Glance (2025–2026)
| Detail | Single Filer | Married Filing Jointly |
|---|---|---|
| Law | OBBBA (P.L. 119-21) | OBBBA (P.L. 119-21) |
| Effective years | 2025 – 2028 | 2025 – 2028 |
| Max deduction | $12,500 | $25,000 |
| MAGI phase-out starts | $150,000 | $300,000 |
| FICA still owed? | Yes | Yes |
| W-2 reporting (2026+) | Box 12, Code TT | Box 12, Code TT |
| Applies to state taxes? | Federal only (varies by state) | Federal only (varies by state) |
What Is the "No Tax on Overtime" Rule?
The "No Tax on Overtime" provision is a new federal income tax deduction created by the One Big, Beautiful Bill Act (OBBBA), signed into law on July 4, 2025 (Public Law 119-21). It allows eligible non-exempt hourly workers to deduct a portion of their overtime pay — specifically the premium portion — from their federal taxable income. The deduction is retroactive to January 1, 2025, and runs through December 31, 2028.
Despite its name, not all overtime pay becomes tax-free. The deduction targets only the "half" of time-and-a-half — the extra premium required by the Fair Labor Standards Act (FLSA) — not the entire overtime paycheck. Understanding this distinction is exactly what our no tax on overtime calculator is designed to help you do.
How to Calculate the No Tax on Overtime Deduction — Step by Step
Calculating your no tax on overtime deduction involves four simple steps. Our calculator automates all of this, but here is exactly how the math works so you can verify every number.
Step 1 — Identify Your Regular Hourly Rate
Your regular rate of pay is the base hourly wage used for FLSA overtime calculations. This may differ from your stated pay rate if you earn nondiscretionary bonuses, shift differentials, or commissions — the IRS and FLSA require these to be "blended" into the regular rate before computing the premium.
Step 2 — Calculate the Overtime Premium Rate
The overtime premium is 0.5 × your regular rate. At time-and-a-half ($1.5×), the full overtime rate breaks into 1× (straight time, taxable) + 0.5× (premium, deductible). Only the 0.5× portion is "qualified overtime compensation" (QOC) under the OBBBA.
Step 3 — Multiply by Annual Overtime Hours
Count all hours worked beyond 40 per workweek during the tax year that were paid at the FLSA-required time-and-a-half rate. Only FLSA-mandated overtime counts — overtime paid voluntarily by an employer above FLSA requirements, or required under a state law alone, does not qualify.
Step 4 — Apply the Cap and MAGI Phase-Out
Your QOC deduction is capped at $12,500 (single) or $25,000 (married filing jointly). If your modified adjusted gross income (MAGI) exceeds $150,000 (single) or $300,000 (joint), the deduction phases out on a dollar-for-dollar basis.
Step 5 — Estimate Your Federal Tax Savings
Multiply your allowable deduction by your marginal federal income tax rate to get your estimated federal tax savings. Remember: this is a deduction, not a tax credit, so the savings depend on your bracket. A worker in the 22% bracket saves $0.22 per dollar of deduction; a worker in the 12% bracket saves $0.12.
No Tax on Overtime Calculation Example
Here is a realistic no tax on overtime calculation example that walks through the full process for a single filer in 2026.
| Variable | Value |
|---|---|
| Filing status | Single |
| Regular hourly rate | $22.00 / hr |
| Overtime hours per week (average) | 8 hrs |
| Weeks worked with overtime | 48 weeks |
| Total annual overtime hours | 384 hrs |
| Total overtime pay (at $33/hr) | $12,672 |
| Straight-time portion ($22 × 384) | $8,448 — still taxable |
| Premium portion ($11 × 384) | $4,224 — qualified OT compensation |
| Deduction cap (single) | $12,500 |
| QOC deductible (below cap) | $4,224 |
| Marginal tax bracket | 22% |
| Estimated federal tax savings | $929 |
| MAGI (estimated gross income) | $68,000 — no phase-out applies |
In this scenario, the worker deducts $4,224 from taxable income and saves $929 in federal income taxes. At higher overtime hours (for example, 700+ hours/year), the deduction hits the $12,500 cap and the maximum savings would be $2,750 in the 22% bracket.
Understanding the MAGI Phase-Out
Many workers want to know: how is the no tax on overtime calculated for higher earners? If your modified adjusted gross income (MAGI) exceeds the threshold, your deduction is reduced. Here is how the phase-out works for tax year 2026:
- Single filer: Phase-out begins at $150,000 MAGI
- Married filing jointly: Phase-out begins at $300,000 MAGI
- The deduction reduces dollar-for-dollar above these thresholds
- At $162,500 MAGI (single), the full $12,500 deduction is eliminated
- At $325,000 MAGI (joint), the full $25,000 deduction is eliminated
Most overtime-eligible hourly workers earn well below these thresholds, so the phase-out will not affect the majority of people using this calculator.
How Will No Tax on Overtime Work in 2026? — W-2 Box 12 Code TT
Starting January 1, 2026, employers are legally required to report your qualified overtime compensation separately on your W-2. The IRS introduced Box 12, Code TT specifically for this purpose. Here is what to expect:
- Box 12, Code TT on your 2026 W-2 will show your total qualified overtime compensation — the premium portion only.
- You carry this amount to Schedule 1-A of Form 1040 to claim the deduction.
- For tax year 2025, employers were not required to report separately, but many did via Box 14 labeled "QUAL OT." IRS Notice 2025-69 describes approved estimation methods for 2025 returns.
- Tax software (TurboTax, H&R Block, FreeTaxUSA) will automatically pull the Code TT amount when you import your 2026 W-2.
No Tax on Overtime by State — California, Texas, Florida, Pennsylvania & More
A common question is: does no tax on overtime apply in my state? The OBBBA is a federal law — it reduces your federal income tax only. Whether your state income tax follows suit is a separate decision made by each state legislature.
| State | State Income Tax? | OT Deduction Adopted? |
|---|---|---|
| Texas | No state income tax | N/A — no state tax benefit needed |
| Florida | No state income tax | N/A — no state tax benefit needed |
| California | Yes (up to 13.3%) | Not adopted as of 2026 |
| Pennsylvania | Yes (3.07%) | Not adopted as of 2026 |
| New York | Yes (up to 10.9%) | Not adopted as of 2026 |
| Illinois | Yes (4.95%) | Not adopted as of 2026 |
| Michigan | Yes (4.25%) | Confirm with state tax authority |
| North Carolina | Yes (4.75%) | Confirm with state tax authority |
| New Jersey | Yes (up to 10.75%) | Not adopted as of 2026 |
| Indiana | Yes (3.15%) | Confirm with state tax authority |
| Kentucky | Yes (4%) | Confirm with state tax authority |
| Missouri | Yes (up to 4.8%) | Confirm with state tax authority |
| Massachusetts | Yes (5%) | Not adopted as of 2026 |
State conformity changes frequently. Always verify with your state's department of revenue before filing.
Who Qualifies for the No Tax on Overtime Deduction?
Eligibility is based on FLSA overtime rules and IRS requirements. You qualify if all of the following apply:
- You are a non-exempt employee under the Fair Labor Standards Act
- You worked more than 40 hours in a workweek
- Your employer paid you at least 1.5× your regular rate for those hours
- Your overtime is reported on a Form W-2 (or 1099 in some cases)
- You have a valid Social Security number
- If married, you and your spouse file a joint return to claim the higher $25,000 cap
Who Does NOT Qualify
- Salaried exempt employees (executive, administrative, professional exemptions)
- Workers whose overtime is paid above FLSA requirements by employer policy only
- Workers whose overtime is required only by state law, not the federal FLSA
- Taxpayers whose MAGI exceeds the phase-out threshold (deduction is fully reduced)
- Taxpayers without a valid Social Security number for employment
Tips to Maximize Your No Tax on Overtime Savings
Keep detailed overtime records
Track every overtime hour by workweek. In 2025, your employer may not have reported Code TT automatically. IRS Notice 2025-69 provides approved estimation methods — but your own records are the best backup.
Check your regular rate calculation
If you receive nondiscretionary bonuses, commissions, or shift premiums, your FLSA regular rate may be higher than your base hourly wage. A higher regular rate means a larger premium and a bigger deduction.
File jointly if married
The joint filing deduction cap ($25,000) is exactly double the single cap ($12,500) and the phase-out threshold is also double. If both spouses earn overtime, filing jointly captures both premiums.
Stay below the MAGI threshold
Contributing to a traditional 401(k) or HSA reduces your MAGI. If you are near the $150,000 / $300,000 phase-out, pre-tax retirement contributions can preserve your full overtime deduction.
Understand what our OBBBA master calculator covers
If you also earn qualified tips, use our combined OBBBA deduction calculator to model both provisions together and see your total federal tax savings.
Do not confuse the deduction with withholding
Your employer still withholds taxes on overtime paychecks throughout the year. You recover the savings when you file your return and claim the deduction on Schedule 1-A of Form 1040.
No Tax on Overtime Deduction vs. Tax Credit — What's the Difference?
Some workers ask whether the OBBBA provides a tax credit or a tax deduction. It is a deduction — and the difference matters significantly for your tax savings.
| Feature | Tax Deduction (OBBBA) | Tax Credit |
|---|---|---|
| Reduces | Taxable income | Tax owed directly |
| Savings depend on | Your tax bracket | Fixed dollar amount |
| 22% bracket savings on $5,000 | $1,100 | $5,000 (if credit was $5,000) |
| 12% bracket savings on $5,000 | $600 | $5,000 (if credit was $5,000) |
| OBBBA type | Above-the-line deduction | N/A |
Official IRS & Government Resources
The following authoritative sources provide the official rules, notices, and forms for the OBBBA overtime deduction:
- IRS: Q&As on the Qualified Overtime Compensation Deduction — Official IRS FAQ covering eligibility, caps, phase-outs, and W-2 reporting (Notice 2025-69).
- Department of Labor: FLSA Overtime Calculator Advisor — Helps determine whether your overtime qualifies under FLSA — a prerequisite for the OBBBA deduction.
- IRS Form 1040 and Schedule 1-A Instructions — Where to claim the deduction on your federal income tax return.