To Get This New Tax Deduction, You Must Calculate Your Overtime Pay—Here’s How

Ask your employer how much you earned in overtime this year. It may impact your tax bill in April.

A new deduction created under the “One Big, Beautiful Bill” allows workers to subtract part of their overtime wages, up to $12,500, or $25,000 for joint filers. This new deduction will be retroactive through the 2025 tax year, allowing workers to claim it when they file their taxes during the 2026 filing season.

Employers will be required to report to the IRS and the worker the amount of qualified overtime pay the worker received that year. Congress approved the deduction in July, leaving little time to make reporting changes, so employers will not be penalized this year if they do not provide their workers with the exact overtime amounts.

There will also not be a separate box for overtime pay on 2025 W-2 forms. Those forms are the tax documents that employers send to workers before the tax filing season, showing the wages earned during that tax year. In many cases, overtime pay will be included within the total “Wages, tips, other compensation” of W-2 forms, although in some cases, it may be listed in Box 14 as “Other.”

That means many workers will have to calculate how much overtime pay they can deduct themselves for the 2025 tax year and will have to work with their employer to obtain this amount, said Alison Flores, director of tax research and content strategy at H&R Block.

“For most people, we expect a pay stub is what we’ll be looking at. So you’ll want your last pay stub of the year,” Flores said. “It hopefully has a line item that shows you the total overtime, which is the time and a half you were paid in most cases, or it splits out and shows overtime hours and then the premium.”

How Will The Overtime Deduction Work?

Overtime pay refers to the wages earned by employees for working more than 40 hours a week, who receive at least one and a half times their regular pay, as regulated by the Fair Labor Standards Act. However, overtime pay does not include extra pay given for working unfavorable shifts, like at night, weekends, or holidays, unless the time worked exceeds 40 hours.

Workers may also only deduct overtime pay that exceeds their regular rate of pay, and the excess amount shall not be more than half of their regular wages.

“There are different ways you can call it: overtime premium, or overtime differential…but when people hear they can deduct overtime, they’re definitely thinking all of it,” Flores said. “They’re thinking the time and a half, and it’s really just that half piece or that premium.”

In some cases, workers at the end of the year will receive a payroll statement that lists the “overtime premium” amount. That term refers to the amount of their overtime payment that exceeds their regular rate of pay.

In an example provided by the IRS, a worker receives their payroll statement from their employer, where their “overtime premium” was $5,000 in 2025. In this case, that worker can deduct the full $5,000 from their taxes.

However, take an employee who receives time and a half during overtime. This worker’s payroll statement shows a total “overtime” amount of $15,000, which combines their “overtime premium” wages and their regular rate of pay received during overtime. In this case, the worker would subtract their wages from the total to determine that they can deduct $5,000 from their taxes.

Now, take a worker whose employer pays for overtime at twice their regular rate. At the end of the year, their payroll statement shows their total overtime pay for 2025 was $20,000. This worker will need to divide their $20,000 by two to calculate their “overtime premium” wages. However, since the tax rule allows workers to deduct only up to half of their regular rate of pay, this worker will be able to deduct half that amount—$5,000—from their taxes.