It sounds great, no tax on overtime. But what does it really mean?
The new tax break doesn’t totally eliminate taxes on overtime earnings, but if you qualify, it could mean more money in your pocket.
The One Big Beautiful Bill Act (OBBBA) became law on July 4, 2025, and included several new tax breaks. One is a new deduction for overtime pay.
The deduction is temporary, effective for tax years 2025 through 2028 for overtime pay under section 7 of the Fair Labor Standards Act (FLSA), affecting about 143 million people. Taxpayers can deduct some of the pay that exceeds their regular pay rate, so if you get time and a half, you can deduct the half. Put another way, not all OT you earn is deductible. Only the pay above your regular rate is deductible, and the amount is capped.
The maximum deduction for no tax on overtime is $12,500 or $25,000 for joint filers, and it phases out based on income level, beginning at $150,000 for single filers and $300,000 for joint filers.
The FLSA requires at least minimum wage payment for all hours worked and overtime at no less than time-and-a-half for hours worked in excess of 40 hours, but as you can imagine, there are exceptions.
Determining if you are eligible can get a bit confusing, and there are many caveats. Some information from the Department of Labor can help.
The tax deduction is available whether you itemize deductions or claim the standard deduction on your tax returns. Once your income is over $150,000 (single filers) or $300,000 (joint filers), you can no longer claim the deduction.
In order to file, you will need a Social Security number, and if you’re married, you must file jointly to claim the deduction.
Employees who are paid hourly and other non-exempt employees are eligible to deduct their overtime. Most salaried employees generally do not qualify. Even if you are eligible for the federal tax deduction on overtime, some state taxes and other payroll taxes might still apply.
In order to claim the deduction, first you need to know how much overtime you worked.
Employers are not required to account for overtime separately for tax year 2025, but they might. Your overtime pay could appear on a Form W-2, Form 1099-NEC, or Form 1099-MISC.
Since there are many ways for employers to document and pay employees, the IRS says taxpayers can use what they have to approximate overtime, at least for 2025.
So, for example, if you worked and earned a total overtime amount of $15,000, the qualifying overtime is $5,000. The $15,000 is divided by three to get the half time of the time-and-a-half payment.
If your overtime rate is double time, you figure the amount of overtime by taking the total amount and dividing it by four. So if you made $20,000 in overtime, $5,000 would be the amount of qualifying overtime.
For tax year 2026, employers must include the total amount of qualified overtime on a Form W-2 or Form 1099. That means 2025 is kind of a transition year.
The overtime deduction does not happen automatically. To claim it, you need to fill out a Schedule 1-A (Form 1040).
If you itemize your taxes, this schedule is in addition to a Schedule A.
To fill out the Schedule 1-A, you’ll need a calculator and some basic math skills. It is a two-page form, and you only need to fill out the parts that are applicable to you.
President Trump’s One Big Beautiful Bill Act (OBBBA) became law on July 4, 2025, and included several changes to tax deductions, including a tax deduction for overtime.
No, the tax deduction for overtime is through tax year 2028.
Yes. You must file a Schedule 1-A and attach it to your Form 1040.
