No Tax on Overtime: How Much You Actually Save in 2026

No tax on overtime does not make all overtime pay tax-free. It lets eligible workers deduct the "half" in time-and-a-half, the premium federal law requires, up to $12,500 a year ($25,000 on a joint return) for 2025 through 2028. For a typical single hourly worker, that cuts federal income tax by roughly $300 to $3,000 a year.

Social Security and Medicare taxes still apply to every overtime dollar, and most states still tax it. Here is who qualifies, what counts, and what the deduction is worth at common wages.

No Tax on Overtime Rules at a Glance

Sources: IRS: What to know about the no tax on overtime deduction, IRS overtime Q&A and the 2026 Schedule 1-A draft.

What Counts as Qualified Overtime

Say you earn $30 an hour and work 10 overtime hours at time-and-a-half. You are paid $45 for each overtime hour, $450 in total. Of that, $300 is your regular rate and $150 is the premium. Only the $150 is deductible.

• You must be overtime-eligible under federal law. Workers who are exempt from the FLSA's overtime rules, such as many salaried managers and professionals, do not qualify even if their employer pays them extra for long hours.
• Double time counts only partly. If you are paid twice your rate, only the half-time portion federal law requires is deductible.
• Extra overtime from a union contract or state law does not count beyond what the FLSA itself requires, which is time-and-a-half for hours over 40 in a workweek.

Your "regular rate" may be higher than your hourly wage

Under the FLSA, the regular rate used for overtime includes more than base pay. Shift differentials and most nondiscretionary bonuses, such as production or attendance bonuses, are folded in (U.S. Department of Labor). A higher regular rate means a larger required premium, and so a larger deduction. Your employer's figure in box 12 of your W-2 should already reflect this.

Two jobs, one cap

If you work overtime for more than one employer, add the qualified amounts from every W-2. The $12,500 cap applies to your return as a whole, not to each job. Overtime-eligible workers paid on a salary basis can qualify too, because eligibility depends on FLSA status, not on whether you are paid hourly.

How Much Tax You Save: Wage and Overtime Table

This table shows 2026 federal income tax saved by a single filer. Assumptions: 40 regular hours a week, overtime every week for 52 weeks at time-and-a-half, no other income, the $16,100 standard deduction and the 2026 tax brackets from Rev. Proc. 2025-32.

The savings equal the deduction times your top tax rate. At $20 an hour the deduction comes off income taxed at 12%. From $30 an hour most of it comes off income taxed at 22%, and at $50 an hour part of it comes off the 24% bracket. In the last row the $13,000 premium is above the cap, so only $12,500 is deductible. Plug in your own rate and hours with the overtime calculator.

A quick rule of thumb: for every $1,000 of overtime pay at time-and-a-half, about $333 is the deductible premium. In the 12% bracket that saves about $40, and in the 22% bracket about $73.

Worked Example: A Nurse at $40 an Hour

Dana is single, earns $40 an hour and averages 10 overtime hours a week in 2026.

• Regular pay: $40 x 40 x 52 = $83,200.
• Overtime pay: $60 x 10 x 52 = $31,200.
• Qualified premium: $20 x 10 x 52 = $10,400, under the $12,500 cap.
• Taxable income falls from $98,300 to $87,900, all within the 22% bracket.
• Federal income tax saved: $10,400 x 22% = $2,288.

What Dana still pays on the overtime: 7.65% Social Security and Medicare tax on the full $31,200, which is $2,386.80, plus any state income tax. So the deduction roughly cancels her payroll tax on overtime, but the overtime is far from tax-free. The paycheck calculator shows the effect on each check.

The Income Phase-Out

The cap drops by $100 for every full $1,000 of modified adjusted gross income (MAGI) above $150,000, or $300,000 for joint filers. For most people MAGI is simply adjusted gross income.

• Single, MAGI $170,000, $12,500 of qualified overtime: $20,000 over the threshold, so the cap falls by $2,000 to $10,500.
• Single, MAGI $275,000 or more: the deduction is fully phased out.
• Married filing jointly, MAGI $320,000, $25,000 of combined qualified overtime: the cap falls by $2,000 to $23,000.

Married Couples

Couples must file jointly to claim the deduction, and the cap is $25,000 per joint return. Each spouse who earned the overtime needs a work-eligible Social Security number. Two spouses each earning $10,000 of qualified premium can deduct the full $20,000.

Does Your State Follow the Federal Deduction?

It depends on the state, and most do not follow it automatically. Many states start their tax calculation from federal adjusted gross income, and the overtime deduction is taken after AGI, so it does not flow through unless a state passes its own rule. A few states start from federal taxable income or have adopted their own overtime break. States with no wage income tax, such as Texas and Florida, do not tax overtime at all. Check your state revenue department, or compare your state's overall burden in our state income tax comparison.

Getting the Benefit in Your Paycheck, Not Just at Tax Time

Your employer withholds tax as if the overtime were fully taxable, so by default the savings arrive as a bigger refund. To keep more in each paycheck, you can list the expected deduction on a new Form W-4 (Step 4(b), deductions). The W-4 withholding calculator helps you pick the amount. Overestimating can leave you owing, so be conservative if your overtime varies.

For 2025 returns, employers were not required to report qualified overtime separately, so many workers estimated it from pay stubs using the Schedule 1-A instructions. From 2026, it appears on your W-2 in box 12 with code TT.

How It Fits With Other New Deductions

The overtime deduction can be combined with the deduction for tips (up to $25,000), the $6,000 senior deduction and the car loan interest deduction. All are claimed on Schedule 1-A. If you earn tips as well, try the no tax on tips calculator. For the full list of changes, see OBBBA 2026 explained.

Frequently asked questions