No Tax on Overtime: How the $12,500 Deduction Works
- You can deduct qualified overtime pay, which is the part of overtime that exceeds your regular rate (the “half” in time-and-a-half).
- The maximum deduction is $12,500 a year, or $25,000 if you file jointly.
- It phases out above $150,000 of modified AGI ($300,000 joint), and you need a valid Social Security number.
The new federal deduction for overtime pay is one of the bigger tax changes for hourly workers, but it is often misunderstood. It doesn’t make all overtime tax-free.
What counts
According to the IRS, “if you receive qualified overtime compensation, you may deduct the pay that exceeds your regular rate of pay” (IRS: What to know about the No Tax on Overtime deduction). If you earn $20 an hour and get $30 for an overtime hour, only the $10 premium is deductible, not the full $30.
The limits
- Maximum annual deduction: $12,500, or $25,000 if filing jointly.
- Phases out when modified adjusted gross income is over $150,000, or $300,000 for joint filers.
- You must have a valid Social Security number.
- If married, you must file jointly.
- You can take it whether you itemize or take the standard deduction.
How to claim it
The IRS says that for 2025, employers weren’t required to report qualified overtime separately on Forms W-2, 1099-NEC and 1099-MISC. If you don’t get a statement showing the amount, you use the instructions for the new Schedule 1-A to calculate it. Keep your final pay stub of the year and any stub that breaks out overtime hours and rates.
Quick example
You earn $25 an hour and work 300 overtime hours in a year at $37.50. Your overtime pay is $11,250, but the deductible premium is $12.50 times 300 hours, or $3,750. In the 12% bracket, that deduction would cut federal income tax by $450. It doesn’t reduce Social Security or Medicare taxes, because those are withheld from wages under separate rules.
What only counts if it’s required overtime
“Qualified” overtime refers to overtime required by the Fair Labor Standards Act, generally hours over 40 in a workweek for non-exempt employees. Extra premiums your employer pays voluntarily, such as daily overtime under company policy, may not count. See the IRS FAQs for details.
Published October 27, 2026. Sources are linked in the text.
Header image: original graphic by JobPayRaise.com.
Comments (1)
One related rule worth checking before you claim it: overtime is only “required” under the FLSA if you are non-exempt. Most salaried employees earning at least $684 a week ($35,568 a year) who pass the duties test are exempt and don’t receive FLSA overtime. Source: DOL: Earnings Thresholds for the FLSA Part 541 Exemptions.