No Tax on Overtime: How Much More You Keep in 2026
"No tax on overtime" is a federal deduction, not a full exemption. See the real 2026 math: only the premium half qualifies, and FICA and state tax still apply.
This article is general information, not tax or financial advice. Tax rules change, individual situations vary, and every figure here is an estimate. Confirm specifics with a qualified tax professional before making money decisions.
”No tax on overtime” is a deduction, not an exemption
The phrase “no tax on overtime” makes it sound like your overtime check now lands in your account untouched. It doesn’t.
What the law actually created is a federal income-tax deduction for a slice of your overtime pay. The One Big Beautiful Bill Act (OBBBA) added an above-the-line deduction for “qualified overtime compensation,” available for tax years 2025 through 2028. After 2028 it sunsets unless Congress extends it.
Two things follow from the word “deduction.” First, it lowers the income that gets taxed, not the tax itself, so what you keep depends on your bracket. Second, it applies to federal income tax only. Payroll tax, and in most states, state income tax, are untouched.
If you only read one paragraph, read this one: you keep more, but nowhere near the whole overtime check. For a typical hourly worker the real benefit runs a few hundred to a couple thousand dollars a year, and it usually shows up at tax time rather than in each paycheck. The rest of this piece shows exactly how that number is built.
Only the premium half counts as “qualified overtime”
This is the part the headline hides. The deduction does not apply to your entire overtime check, only to the premium portion.
Under the Fair Labor Standards Act (FLSA), covered non-exempt workers earn time-and-a-half for hours over 40 in a week. Time-and-a-half breaks into two pieces: your regular rate, plus an extra half of that rate on top. That extra “half” is the premium, and it is the only part that counts as qualified overtime compensation.
Say your regular rate is $30 an hour. Your overtime rate is $45. Of that $45, the first $30 is just your normal wage carried into overtime hours, and the remaining $15 is the premium. Only the $15 per overtime hour is deductible.
To back the premium out of a total overtime figure, take one-third of your time-and-a-half overtime pay. A $45 overtime hour is $30 base plus $15 premium, and $15 is a third of $45. So if your pay stub shows $22,500 of time-and-a-half overtime for the year, roughly $7,500 of that is the qualifying premium.
One catch for anyone earning double-time. If your employer pays double-time (twice the regular rate) for holidays or contract reasons, only the FLSA-required half still qualifies. The extra premium your employer adds on top does not increase your deduction.
The caps and the phase-out for tax year 2026
There is a ceiling on how much overtime premium you can deduct, plus a phase-out for higher earners. Here are the tax year 2026 figures.
- Deduction cap: up to $12,500 of qualified overtime if you file single, or $25,000 if you file jointly. This is per tax return, not per person.
- Income phase-out: the deduction starts shrinking once your modified adjusted gross income (MAGI) tops $150,000 single or $300,000 joint. Above that line, it drops by $100 for each full $1,000 over the threshold. Schedule 1-A counts whole thousands only, so $2,900 over the line costs $200, not $290.
- Filing rule: if you are married, you must file jointly to claim it. Section 225(e) leaves married filing separately with no deduction at all, not a halved one.
- SSN required: you need a valid Social Security number.
- No itemizing needed: you can claim this whether you take the standard deduction or itemize. It sits above the line.
The eligibility gate matters too. This is for FLSA-covered, non-exempt workers earning FLSA-required overtime. Salaried-exempt employees who get extra pay for long hours generally do not qualify, because that pay is not FLSA overtime.
What still gets taxed: FICA and state income tax
The deduction is narrow on purpose. Two big taxes on your overtime do not go away.
FICA still applies to every dollar. Social Security (6.2%) and Medicare (1.45%) add up to 7.65%, and they come out of your full overtime pay, premium included. Nothing about “no tax on overtime” changes that. Your employer withholds payroll tax on the whole check the same as always.
State income tax usually still applies. The deduction is a federal provision. Most states have not conformed to it, so your state can still tax overtime in full. California taxes it (roughly 1% to 13.3% by bracket), New York taxes it (about 4% to 10.9%), and Illinois taxes it at its flat 4.95%. Live in a no-income-tax state like Texas or Florida, and there is no state layer to worry about, so you get the federal benefit without a state offset.
This is why the honest answer to “how much do I keep” is never the full check. FICA and state tax keep taking their cut of the overtime whether or not the federal deduction applies.
Worked example: how much you actually keep
Numbers make this concrete. Here is a single hourly worker with no phase-out, in the 22% federal bracket, working 10 overtime hours a week for 50 weeks.
| Step | Figure |
|---|---|
| Regular rate | $30.00/hr |
| Overtime rate (time-and-a-half) | $45.00/hr |
| Premium portion (the FLSA “half”) | $15.00/hr |
| Overtime hours for the year | 10 × 50 = 500 hrs |
| Gross overtime pay for the year | 500 × $45 = $22,500 |
| Qualified overtime (premium only) | 500 × $15 = $7,500 |
| Deduction claimed (under $12,500 cap) | $7,500 |
| Federal income tax saved (22% × $7,500) | $1,650 |
| FICA still owed on the premium (7.65% × $7,500) | $573.75 (unchanged) |
| State tax still owed (California ~9.3% × $7,500) | ~$698 (unchanged; $0 in TX/FL) |
Read the bottom line carefully. The worker keeps about $1,650 more in federal tax for the year. That is real money, but it is not the $5,000-plus the “no tax on overtime” label implies.
The whole $22,500 overtime check was never tax-free. Only the $7,500 premium was deductible, and only from federal income tax. FICA still takes about $574 off that premium, and in California the state still claws back roughly $700. In a no-income-tax state, the only offset on the premium is FICA.
And remember the double-time contrast. If this worker earned double-time instead of time-and-a-half, only the FLSA-required half ($15/hr) still qualifies. The bigger check would not grow the deduction.
How to claim it and model your own paycheck
The deduction is claimed at tax time, not automatically wired into each check. You compute your qualified overtime on Schedule 1-A, and it carries to Form 1040, line 13b. You can do this even if you take the standard deduction.
For tax year 2026, employers report qualified overtime in W-2 box 12 with code “TT,” so the number should be handed to you. For the 2025 tax year, separate employer reporting was not required, so you may need to compute the premium yourself using the Schedule 1-A instructions.
This is a filing-time benefit, which is the part that trips people up. Your gross overtime check during the year is unchanged. You see the payoff as a lower tax bill or a larger refund when you file, unless you adjust your W-4 withholding to capture it sooner. If tuning withholding interests you, our guide on why your bonus gets taxed so much walks through the same prepayment-versus-real-tax distinction.
Because your real number depends on your bracket, your state, your filing status, and how close you are to the cap, this is worth modeling rather than guessing. That is what the Salary Calculator app (Stub44) is built for: it runs the full federal, state, and FICA math across all 50 states plus DC, so you can enter your pay with overtime and see the actual take-home. Set up a saved profile with your overtime hours, compare it against a no-overtime baseline, and the real net difference is right there. When you are ready to test your own numbers, you can download Salary Calculator and run it in about a minute.
Frequently Asked Questions
Is my whole overtime paycheck now tax-free?
No. Only the premium (the "half" of time-and-a-half) is deductible, and only from federal income tax. The rest of the overtime check is taxed like normal.
Do I still pay Social Security and Medicare on overtime?
Yes. FICA (7.65%) applies to the full overtime pay, premium included. The deduction only affects federal income tax, not payroll tax.
How much can I actually deduct?
Up to $12,500 (single) or $25,000 (joint) of qualified overtime for tax year 2026. Qualified overtime means the premium portion only, not the whole overtime check.
What if I earn too much?
The deduction phases out above $150,000 MAGI ($300,000 joint), reduced by $100 for each full $1,000 over the threshold. A partial thousand costs you nothing until it is complete.
Does my state still tax overtime?
Usually yes. The deduction is federal only, and most states (including California, New York, and Illinois) still tax overtime. No-income-tax states like Texas and Florida benefit fully.
Which workers qualify?
FLSA-covered, non-exempt workers earning FLSA-required overtime. Salaried-exempt workers generally do not qualify.
How do I claim it?
On Schedule 1-A, carried to Form 1040 line 13b, even if you take the standard deduction. For tax year 2026, look for your qualified overtime in W-2 box 12, code "TT."
Will I see it in each paycheck or as a refund?
Typically at filing, as a lower tax bill or bigger refund, unless you adjust your withholding. Your gross overtime check is unchanged during the year.