"No tax on overtime" is probably the most misunderstood phrase in the 2025 tax law. Many workers heard it as: every dollar I earn during overtime hours is now tax-free. That is not what the law says — and the gap between the slogan and the statute can be thousands of dollars of expectation.

Here is the rule in one sentence: only the overtime premium — the extra pay above your regular rate that federal law requires — is deductible, up to $12,500 a year ($25,000 on a joint return).

What "premium" actually means

The Fair Labor Standards Act (FLSA) requires most hourly workers to be paid at least time-and-a-half for hours beyond 40 in a week. Say your regular rate is $20 an hour. Your overtime rate is $30. When you work an overtime hour, that $30 splits into two parts for tax purposes:

  • $20 — your regular rate. Taxed normally, exactly like a regular hour. The law does not touch it.
  • $10 — the premium, the "half" in time-and-a-half. This part, and only this part, is deductible.

So a nurse who earned $9,000 of total overtime pay at time-and-a-half has roughly $3,000 of qualified premium — one third of the total, not the whole $9,000.

Example — factory worker, single, 300 OT hours at $30/hr ($20 base)

  1. Line 1Total overtime pay (300 × $30)$9,000
  2. Line 2Regular-rate portion (300 × $20)$6,000
  3. Line 3Qualified premium (300 × $10)$3,000
  4. Line 4Smaller of premium or $12,500 limit$3,000
  5. Line 5Overtime deduction$3,000

At a 22% marginal rate, that $3,000 deduction saves about $660 of federal tax. Meaningful — but far from "my overtime is tax-free."

Which overtime qualifies (and which doesn't)

The deduction covers premiums required by section 7 of the FLSA. That leads to some unintuitive exclusions:

  • Overtime paid only because of a state law(like California's daily overtime) or a union contract — not qualified, unless the FLSA would also require it.
  • Exempt employees(many salaried roles) — the FLSA doesn't require them to receive overtime, so any extra pay isn't a qualified premium.
  • Double-time bonuses beyond what the FLSA requires — only the FLSA-required portion of the premium counts.

Like the tips deduction, you need a valid Social Security number, and married couples must file jointly. You don't need to itemize.

If your pay stub only shows a total

Plenty of payroll systems print one overtime line and never break out the premium. IRS guidance for the 2025 filing season shows how to back into the number, and the arithmetic is the same in later years:

  • Paid at time-and-a-half? Divide total overtime pay by 3. Each overtime hour is 1.5 units of your regular rate, and the premium is 0.5 of those — one third.
  • Paid at double time? Divide by 4. This one surprises people. Double time pays 2.0 units per hour, but the FLSA only requires the extra 0.5, so only a quarter of the total is a qualified premium. The IRS illustrates exactly this: a worker whose employer pays overtime at twice the regular rate and who received $20,000 of overtime pay may treat $5,000 as qualified — $20,000 divided by 4.
  • Pay stub already labels an "overtime premium"? Use that figure as is. No division needed.

Example — double time, $20,000 total overtime pay

  1. Line 1Total overtime pay for the year$20,000
  2. Line 2Paid at 2× regular rate — divide by 4÷ 4
  3. Line 3FLSA-required premium portion$5,000
  4. Line 4Smaller of premium or $12,500 limit$5,000
  5. Line 5Overtime deduction$5,000

The extra half above time-and-a-half is generous of your employer, but the deduction follows the statute, not the contract.

The income phase-out

Above $150,000 of modified adjusted gross income ($300,000 joint), the deduction shrinks by $100 for each full $1,000 of income over the line — the same mechanism as the tips deduction, and the IRS worksheet rounds the excess down to whole thousands. A single filer at $175,000 MAGI loses $2,500 of the cap; at $275,000 the deduction is fully gone.

Example — single, $8,000 premium, $162,300 MAGI

  1. Line 1Qualified overtime premium$8,000
  2. Line 2Smaller of premium or $12,500 limit$8,000
  3. Line 3MAGI over $150,000 threshold$12,300
  4. Line 4Phase-out reduction (12 × $100)−$1,200
  5. Line 5Overtime deduction$6,800

Your paycheck won't change — the refund does

Payroll withholding still works the way it always has: your employer withholds income tax, Social Security, and Medicare on your full overtime pay. The deduction shows up when you file — for tax year 2026, that means the return you file in early 2027. Employers report qualified overtime on your W-2 (see our W-2 code TT guide), and you compute the deduction on Schedule 1-A. If your employer doesn't break out the premium, ask payroll for a year-end summary — you'll want the premium figure, not total overtime.

Three situations that surprise people

  • Salaried but working long hours. If your role is classified as exempt under the Fair Labor Standards Act, no overtime premium is legally required — so there is nothing to deduct, however many hours you actually worked. The deduction follows the legal requirement, not the effort.
  • Overtime your employer pays voluntarily. Some contracts and state rules pay a premium the FLSA does not require. The money is real, but it does not become a qualified overtime figure — which is why a generous employer can leave you with a smaller deduction than a co-worker at a stricter one.
  • A high-income year you didn't plan for.The phase-out watches your total income, not your hours. A bonus, a second job, or a spouse's raise can shrink a deduction you were counting on even though your overtime never changed.

The deduction runs from tax year 2025 through 2028 and then expires under current law. To see your own number — including how it stacks with the tips or senior deduction if you qualify for those too — try the No Tax on Overtime Calculator or the Total Savings Estimator.