No Tax on Overtime: Federal Overtime Compensation Deduction (2025–2028)
⚠️Informational only — not legal or tax advice.
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Table of Contents
- No Tax on Overtime — Key Facts
- What Is the "No Tax on Overtime" Deduction?
- Who Qualifies for the Overtime Deduction?
- How Much Can Be Deducted?
- How to Claim the Deduction: Step-by-Step Filing Process
- State-by-State Impact: Which States Conform to the Federal Overtime Deduction?
- Employer Obligations and Reporting Requirements
- Federal Revenue and Economic Impact
- Relationship to Other OBBBA Deductions
- Frequently Asked Questions
- Overtime Laws by State
- Official Government Sources
No Tax on Overtime — Key Facts
| Federal Overtime Income Deduction — Key Details (2025–2028) | |
|---|---|
| Detail | Information |
| Law | One Big Beautiful Bill Act (P.L. 119-21), Section 70202 (IRC Section 225) |
| Signed into law | July 4, 2025 |
| Effective period | Tax years 2025 through 2028 (retroactive to January 1, 2025) |
| What is deductible | The premium portion of FLSA-required overtime (the “half” of time-and-a-half) |
| Maximum deduction | $12,500 per return (single filers) / $25,000 per return (married filing jointly) |
| Income phaseout begins | $150,000 MAGI (single) / $300,000 MAGI (joint) |
| Deduction fully eliminated | $275,000 MAGI (single) / $550,000 MAGI (joint) |
| Who qualifies | Non-exempt employees covered by FLSA Section 7 (29 USC § 207) |
| Who does NOT qualify | Exempt salaried employees, Married Filing Separately filers |
| IRS Form | Schedule 1-A (Form 1040), Part III |
| Deduction type | Below-the-line (does not reduce AGI; reduces taxable income) |
| Still subject to tax | Social Security tax, Medicare tax (FICA), and applicable state/local income taxes |
What Is the "No Tax on Overtime" Deduction?
The One Big Beautiful Bill Act (OBBBA), Public Law 119-21, was signed into law on July 4, 2025. Among its provisions, the law added a new section to the Internal Revenue Code — IRC Section 225 — creating a federal income tax deduction for qualified overtime compensation.
This deduction is commonly referred to as “no tax on overtime.” The OBBBA is also known as the Working Families Tax Cut Act.
Under this provision, eligible workers covered by the Fair Labor Standards Act (FLSA) may deduct a portion of their overtime pay from their federal taxable income for tax years 2025 through 2028. The deduction applies retroactively to all qualified overtime compensation earned from January 1, 2025 onward.
According to the IRS, the deduction applies specifically to the overtime premium — the portion of overtime pay that exceeds the worker’s regular rate of pay. For a worker receiving the standard FLSA rate of time-and-a-half, the deductible portion is the “half” above the regular rate.
What this deduction is NOT:
This provision does not eliminate all taxes on overtime earnings. According to IRS guidance, it is a federal income tax deduction only. Overtime compensation remains subject to:
- Federal payroll taxes — Social Security tax (6.2% on wages up to $176,100 in 2025) and Medicare tax (1.45% on all wages) continue to apply to all overtime earnings
- State income taxes — unless the state has separately adopted a conforming deduction
- Local income taxes — where applicable
The deduction is available to both taxpayers who itemize deductions and those who claim the standard deduction.
Source: IRS — One Big Beautiful Bill Act: Tax Deductions for Working Americans and Seniors | IRS — Treasury, IRS Provide Guidance for Individuals Who Received Tips or Overtime During Tax Year 2025
Who Qualifies for the Overtime Deduction?
Eligible Workers
According to the IRS and the Department of Labor, eligibility for the overtime deduction depends on the worker’s status under the Fair Labor Standards Act (FLSA), 29 USC § 207.
To qualify, an individual must be:
- Covered by the FLSA — The FLSA covers most employees in the United States, including those employed by enterprises with annual dollar volume of $500,000 or more, as well as individuals engaged in interstate commerce
- Not exempt from FLSA overtime requirements — The individual must be a non-exempt employee eligible for overtime pay under FLSA Section 7
- Receiving overtime compensation at a rate exceeding the regular rate — The FLSA generally requires overtime pay at not less than one and one-half times the regular rate of pay for hours worked over 40 in a workweek
- In possession of a Social Security number valid for employment, issued before the due date of the return (including extensions)
According to the Department of Labor, non-exempt workers are commonly hourly employees. Some salaried employees earning below $684 per week may also be non-exempt and therefore eligible.
For federal employees, FLSA eligibility is typically documented on Standard Form 50 (Notification of Personnel Action), block 35 (“FLSA Category”). The code “N” indicates non-exempt (FLSA overtime-eligible), while “E” indicates exempt (FLSA-ineligible). The Office of Personnel Management (OPM) administers the FLSA for most federal employees.
Source: IRS — FAQ Q2: How Do I Determine Whether I Am Covered by and Not Exempt from the FLSA? | DOL — Fact Sheet #14: Coverage Under the FLSA | OPM — How to Compute FLSA Overtime Pay
Who Does NOT Qualify
According to IRS guidance, the following categories do not qualify for the deduction:
- Exempt salaried employees — Workers classified as exempt under the FLSA (executive, administrative, professional, computer, or outside sales exemptions) are not eligible, regardless of hours worked
- Married Filing Separately filers — The deduction requires joint filing for married taxpayers
- Overtime paid under state law only — Overtime compensation required by state law (such as California’s daily overtime rules) but not required by the FLSA does not constitute qualified overtime compensation
- Overtime paid under union or collective bargaining agreements — Overtime premiums negotiated through labor contracts, beyond what the FLSA requires, are not qualified overtime
- Overtime paid voluntarily by the employer — If the employer pays overtime that exceeds what the FLSA mandates (for example, double-time for holidays), only the FLSA-required portion qualifies
- Stand-by pay, on-call pay, or shift differentials — These forms of compensation are not FLSA-required overtime
- Tips earned during overtime hours — Tips cannot be applied toward the overtime deduction but may qualify for the separate No Tax on Tips deduction
Source: IRS — FAQ Q1: What Is Qualified Overtime Compensation? | DOL — Overtime Pay: General Guidance
| Federal Overtime Deduction — Eligibility Summary | ||
|---|---|---|
| Worker Category | Eligible for Deduction? | Reason |
| Hourly non-exempt employee, works 45 hrs/week | ✅ Yes | FLSA overtime required for hours over 40 |
| Salaried non-exempt employee (<$684/week) | ✅ Yes | Non-exempt under FLSA salary threshold |
| Non-exempt federal employee (SF-50 code "N") | ✅ Yes | FLSA overtime-eligible per OPM classification |
| Salaried exempt manager | ❌ No | Exempt from FLSA overtime requirement |
| Worker paid CA daily overtime only (8+ hrs/day, <40 hrs/week) | ❌ No | State law overtime, not FLSA-required |
| Union contract overtime premium (above FLSA rate) | ❌ No (excess portion) | Only FLSA-required portion qualifies |
| Worker paid double-time on holidays | Partially | Only the FLSA-required “half” qualifies |
| Independent contractor | ❌ No | FLSA overtime provisions apply to employees |
How Much Can Be Deducted?
Maximum Deduction Amounts
Under IRC Section 225, the annual deduction limits are:
| Federal Overtime Deduction — Maximum by Filing Status (2025–2028) | |
|---|---|
| Filing Status | Maximum Deduction |
| Single | $12,500 |
| Head of Household | $12,500 |
| Married Filing Jointly | $25,000 (combined total for both spouses) |
| Married Filing Separately | Not eligible |
The $25,000 limit for joint filers applies to the combined total of both spouses’ qualified overtime compensation. According to the IRS, if one spouse has $20,000 and the other has $15,000 of qualified overtime, the joint deduction is capped at $25,000, not $35,000.
Source: IRS — FAQ Q4: What Is the Deduction Amount?
What Counts as “Qualified Overtime Compensation”
The deduction applies only to the premium portion of overtime — not the full overtime pay amount.
According to the IRS, for a worker receiving time-and-a-half (the standard FLSA overtime rate), the qualified overtime compensation is the “one-half” portion above the regular rate:
| Federal Overtime Deduction — Calculation Examples (2025–2028) | ||||
|---|---|---|---|---|
| Overtime Rate | Regular Rate | OT Hourly Rate | Deductible per OT Hour | Calculation Method |
| Time-and-a-half (1.5×) | $20/hr | $30/hr | $10/hr | OT rate minus regular rate |
| Time-and-a-half (1.5×) | $30/hr | $45/hr | $15/hr | OT rate minus regular rate |
| Double-time (2.0×) | $20/hr | $40/hr | $10/hr | Only the FLSA-required “half” ($10), not the full $20 premium |
For workers calculating from a lump-sum overtime total, the IRS provides the following methods:
| Federal Overtime Deduction — Qualified OT Calculation Guide (2025–2028) | ||
|---|---|---|
| Overtime Rate Paid | Calculation to Find Qualified OT | Example ($15,000 total OT pay) |
| Time-and-a-half (1.5×) | Total overtime pay ÷ 3 | $15,000 ÷ 3 = $5,000 |
| Double-time (2.0×) | Total overtime pay ÷ 4 | $20,000 ÷ 4 = $5,000 |
| Other rate | Consult IRS Notice 2025-69 for applicable formula | Varies |
Source: IRS — Notice 2025-69 (PDF) | IRS — FAQ Q1
Income Phaseout
The deduction phases out for higher-income taxpayers based on modified adjusted gross income (MAGI):
| Federal Overtime Deduction — Income Phaseout Rules (2025–2028) | |||
|---|---|---|---|
| Filing Status | Phaseout Begins | Phaseout Rate | Deduction Fully Eliminated |
| Single / Head of Household | $150,000 MAGI | -$100 per $1,000 above threshold | $275,000 MAGI |
| Married Filing Jointly | $300,000 MAGI | -$100 per $1,000 above threshold | $550,000 MAGI |
Phaseout calculation example:
A single filer with MAGI of $160,000 and $12,500 of qualified overtime compensation:
- MAGI exceeds threshold by $10,000 ($160,000 – $150,000)
- Phaseout reduction: $10,000 ÷ $1,000 = 10 × $100 = $1,000
- Allowable deduction: $12,500 – $1,000 = $11,500
According to IRS guidance, MAGI for this purpose equals adjusted gross income (Form 1040, line 11b) plus any deduction or exemption claimed for income from Puerto Rico, foreign earned income exclusion (Form 2555), or income excluded under possession exclusion rules (Form 4563).
Source: IRS — Notice 2025-69 (PDF) | IRS — Schedule 1-A (Form 1040)
How to Claim the Deduction: Step-by-Step Filing Process
Tax Year 2025 — Transition Year (Returns Filed in 2026)
For the 2025 tax year, the IRS designated a transition period for the implementation of reporting requirements.
Key transition rules for 2025:
According to IRS Notice 2025-62, employers are not required to separately report qualified overtime compensation on Forms W-2, 1099-NEC, or 1099-MISC for tax year 2025. The IRS provided penalty relief to employers in connection with these reporting obligations for the 2025 tax year.
Some employers may voluntarily provide qualified overtime information through:
- Box 14 (“Other”) on Form W-2
- An online payroll portal or employee self-service system
- A separate written statement
If an employer does not provide a separate accounting of qualified overtime for 2025, the IRS has outlined multiple methods for workers to calculate their own deduction amount using pay stubs, payroll records, or year-end compensation statements. These methods are described in IRS Notice 2025-69 and the instructions to Schedule 1-A.
Additionally, a safe harbor rule applies for 2025 only, allowing employers to average overtime hours from the second half of the year (July through December 2025) to calculate the deduction amount. This rule was implemented because the law was not enacted until halfway through the 2025 tax year.
Source: IRS — Notice 2025-62 (PDF) | IRS — FAQ Q6 and Q7
Tax Year 2026 and Beyond — New Reporting Requirements
Beginning with tax year 2026, employers and other payors are required to separately report qualified overtime compensation. According to IRS draft guidance for the 2026 Form W-2:
- W-2 Box 12, Code “TT” — Employers must report the total amount of qualified overtime compensation using this new code
- Updated Form W-4 — The IRS has issued a revised Form W-4 for 2026 that includes a new worksheet (Section 1b) for employees who expect overtime pay, allowing adjustments to withholding
- Form 1099-NEC and 1099-MISC — Will also be updated to include separate reporting fields for qualified overtime compensation
Employers must ensure their payroll systems can distinguish FLSA-required overtime from other types of premium pay (state-mandated overtime, union-negotiated overtime, holiday pay, etc.) for accurate reporting.
Source: IRS — FAQ Q6
Filing Process — Schedule 1-A (Form 1040)
The IRS created Schedule 1-A (Form 1040) — “Additional Deductions” — to calculate and claim the overtime deduction and other deductions created by the OBBBA.
Step-by-step filing process:
- Determine MAGI — Complete Part I of Schedule 1-A using adjusted gross income from Form 1040, line 11b, plus applicable additions
- Determine qualified overtime compensation — Using W-2 Box 14 (2025), W-2 Box 12 Code TT (2026+), pay stubs, or other payroll records
- Complete Part III of Schedule 1-A — Enter qualified overtime compensation amount
- Apply cap — Enter the lesser of qualified overtime or $12,500 ($25,000 for joint filers)
- Calculate phaseout — If MAGI exceeds $150,000 ($300,000 joint), reduce by $100 per $1,000 above threshold
- Report on Form 1040, line 13b — Transfer the total from Schedule 1-A, line 38 (total additional deductions)
- Attach Schedule 1-A — Submit with the tax return
This deduction is classified as a “below-the-line” deduction. According to the IRS, below-the-line deductions do not reduce adjusted gross income (AGI) but do reduce taxable income, which lowers the overall tax liability.
Source: IRS — Schedule 1-A (Form 1040) (PDF) | IRS — Instructions for Form 1040 (PDF)
Documentation and Record-Keeping
According to IRS guidance, taxpayers claiming the overtime deduction should maintain documentation to support the amount claimed, including:
- Pay stubs or payroll statements showing regular and overtime hours worked
- W-2 forms (Box 14 for 2025, Box 12 Code TT for 2026+)
- Year-end payroll summaries from employer payroll systems
- Records of the hourly rate and overtime rate paid
- Any written statements or portal records from the employer identifying qualified overtime amounts
The IRS standard record retention period is three years from the date a return is filed.
Source: IRS — FAQ Q7 | IRS — Notice 2025-69 (PDF)
State-by-State Impact: Which States Conform to the Federal Overtime Deduction?
The “no tax on overtime” deduction is a federal provision. Whether the deduction also applies at the state level depends on how each state defines taxable income in relation to the federal tax code.
How State Conformity Works
States generally take one of three approaches to the federal overtime deduction:
- Automatic conformity — States whose tax codes automatically adopt changes to the federal Internal Revenue Code. These states are linked to the federal overtime deduction by default unless they pass legislation to decouple.
- Active adoption — States that pass legislation specifically incorporating the federal overtime deduction into state tax law.
- Non-conformity (decoupling) — States that do not conform to this specific federal provision, either by default or through affirmative legislative or executive action.
States Currently Linked to the Federal Overtime Deduction
According to the Institute on Taxation and Economic Policy (ITEP) and state legislative records, the following seven states are currently connected to the federal overtime deduction:
| State Conformity Snapshot — “No Tax on Overtime” (Links) | |||
|---|---|---|---|
| State | Conformity Type | Overtime Laws | Income Tax |
| Idaho | Auto (by default) | Idaho Overtime Laws | Idaho Income Tax |
| Iowa | Auto (by default) | Iowa Overtime Laws | Iowa Income Tax |
| Michigan | Active adoption | Michigan Overtime Laws | Michigan Income Tax |
| Montana | Auto (by default) | Montana Overtime Laws | Montana Income Tax |
| North Dakota | Auto (by default) | North Dakota Overtime Laws | North Dakota Income Tax |
| Oregon | Auto (by default) | Oregon Overtime Laws | Oregon Income Tax |
| South Carolina | Auto (by default) | South Carolina Overtime Laws | South Carolina Income Tax |
Michigan is the only state where lawmakers actively chose to adopt the federal overtime deduction. The remaining six states are linked by default through the design of their tax codes.
Source: CBO — Estimated Budgetary Effects of P.L. 119-21 | JCT — Estimated Revenue Effects of Tax Provisions, JCX-26-25R | State legislature websites (.gov)
States That Have Decoupled
The following states have taken affirmative action to not conform to the federal overtime deduction:
| States Actively Decoupling from Federal Overtime Deduction | |
|---|---|
| State/Jurisdiction | Action Taken |
| Colorado | State legislature actively decoupled from the overtime deduction |
| Maine | Governor issued instructions to the state tax assessor to not conform to the overtime and tips deductions |
| District of Columbia | City council passed legislation reinforcing decoupling from both the overtime and tips deductions |
Source: CBO — Estimated Budgetary Effects of P.L. 119-21 | State legislature websites (.gov)
States Considering Their Own No Tax on Overtime Legislation
Several states have introduced legislation to create their own state-level overtime tax deductions or exemptions:
| State-Level Overtime Deduction Proposals — Legislative Status | |||
|---|---|---|---|
| State | Bill | Status | Details |
| Ohio | HB 39 | Referred to House Ways and Means Committee | State income tax deduction for overtime wages |
| Pennsylvania | HB 1586 | Introduced | State tax credit for overtime pay |
| Alabama | Previous exemption (2023) | Expired | Had exempted overtime from state income tax; allowed to expire due to higher-than-expected revenue loss impacting public school funding |
Source: State legislative databases (.gov)
States Without Income Tax
Nine states do not levy a state income tax and therefore the federal overtime deduction has no state-level tax impact:
Alaska, Florida, Nevada, New Hampshire (interest/dividends only), South Dakota, Tennessee, Texas, Washington, and Wyoming.
View state income tax information: Income Tax by State
All Other States
For all remaining states, the applicability of the federal overtime deduction at the state level depends on each state’s conformity date with the Internal Revenue Code and legislative action. Many states that use static conformity remained conformed to pre-OBBBA versions of the IRC as of the close of 2025 legislative sessions. Several of these states may update their conformity statutes during 2026 sessions.
Taxpayers in all states should verify the treatment of overtime pay with their state tax agency.
Employer Obligations and Reporting Requirements
Tax Year 2025 — Transition Period
According to IRS Notice 2025-62, employers are not required to separately report qualified overtime compensation on W-2 or 1099 forms for tax year 2025. The IRS designated 2025 as a transition period, providing penalty relief for employers in connection with the new information reporting requirements.
The IRS encourages employers to voluntarily provide employees with information about qualified overtime compensation for 2025 through:
- Box 14 of Form W-2
- An online payroll portal
- A separate written statement
Tax Year 2026 and Beyond — Mandatory Reporting
Beginning with tax year 2026, employers must:
- Separately track FLSA-required overtime — Distinguish qualified overtime compensation (FLSA Section 7) from all other types of premium pay
- Report on Form W-2 — Use Box 12, Code “TT” to report the total qualified overtime compensation amount for each employee
- Update Form W-4 processing — The 2026 Form W-4 includes a new Section 1b worksheet for overtime deduction withholding adjustments
- Maintain records — Keep accurate payroll records identifying FLSA-mandated overtime vs. non-FLSA overtime (state law, union contract, voluntary employer policy)
Employers are not responsible for determining an employee’s individual tax eligibility for the deduction (which depends on MAGI and filing status). According to IRS guidance, employers are obligated only to report qualified overtime compensation. Employers should not provide tax advice to employees regarding the deduction.
Source: IRS — Notice 2025-62 (PDF) | IRS — FAQ Q6
Federal Revenue and Economic Impact
According to published estimates from the Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT):
| Fiscal & Coverage Snapshot — Overtime Deduction (OBBBA) | ||
|---|---|---|
| Metric | Data | Source |
| Total OBBBA revenue reduction (10-year, 2025–2034) | -$4.5 trillion (all tax provisions combined) | CBO |
| Total OBBBA deficit increase (10-year, with interest) | $4.1 trillion | CBO |
| Overtime + tips + car loan + senior deductions (combined, temporary) | Included in $400+ billion temporary tax provisions | JCT (JCX-26-25R) |
| Workers covered by FLSA | ~143 million | DOL |
| Deduction type | Below-the-line (reduces taxable income, not AGI) | IRS |
The overtime deduction is one of several temporary tax provisions in the OBBBA that are currently set to expire after 2028. According to CBO, making all temporary provisions permanent would increase deficits by an additional $858 billion over the 2025–2034 budget window.
Note: The CBO and JCT provide aggregate revenue estimates for the OBBBA’s tax provisions combined. Provision-level breakdowns for the overtime deduction specifically are included in the JCT’s detailed revenue tables (JCX-26-25R).
Source: CBO — Estimated Budgetary Effects of P.L. 119-21 | JCT — Estimated Revenue Effects, JCX-26-25R | DOL — FLSA Coverage
Relationship to Other OBBBA Deductions
The One Big Beautiful Bill Act created four new deductions, all claimed on Schedule 1-A (Form 1040):
| Temporary Federal Deductions — Schedule 1-A Summary (2025–2028) | |||
|---|---|---|---|
| Deduction | Maximum Amount | Schedule 1-A Part | Effective Period |
| No Tax on Tips | $25,000 | Part II | 2025–2028 |
| No Tax on Overtime | $12,500 ($25,000 joint) | Part III | 2025–2028 |
| Car Loan Interest Deduction | Up to $10,000 | Part IV | 2025–2028 |
| Enhanced Deduction for Seniors (age 65+) | $6,000 ($12,000 joint) | Part V | 2025–2028 |
According to IRS guidance, eligible taxpayers may claim multiple Schedule 1-A deductions on the same return. For example, a tipped worker who also earns overtime may claim both the tips deduction (Part II) and the overtime deduction (Part III) separately, subject to each deduction’s individual limits and phaseout rules.
Tips earned during overtime hours cannot apply toward the overtime deduction but may qualify for the tips deduction.
Related: No Tax on Tips: Federal Qualified Tips Deduction Guide (2025–2028)
Source: IRS — Schedule 1-A (Form 1040) (PDF) | IRS — Tax Tip 2026-06
Frequently Asked Questions: No Tax on Overtime
Is overtime pay completely tax-free now?
No. According to the IRS, the One Big Beautiful Bill Act created a federal income tax deduction for the premium portion of FLSA-required overtime pay, up to $12,500 per return ($25,000 for joint filers). Overtime compensation remains subject to Social Security tax, Medicare tax, and applicable state and local income taxes. The deduction reduces federal taxable income but does not eliminate all taxes on overtime.
Source: IRS — One Big Beautiful Bill Act: Tax Deductions for Working Americans and Seniors
Who qualifies for the no tax on overtime deduction?
According to the IRS, the deduction is available to non-exempt employees whose overtime compensation is required under Section 7 of the Fair Labor Standards Act (29 USC § 207). The taxpayer must have a valid Social Security number. Married taxpayers must file a joint return to claim the deduction.
Source: IRS — FAQ Q1 and Q5
How much overtime pay can be deducted?
The maximum annual deduction is $12,500 per return for single filers and $25,000 for married filing jointly. Only the premium portion of FLSA-required overtime qualifies — for time-and-a-half, this is the “half” above the regular rate. The deduction phases out for taxpayers with MAGI above $150,000 (single) or $300,000 (joint).
Source: IRS — FAQ Q4
How is qualified overtime compensation calculated?
According to IRS Notice 2025-69, for workers paid time-and-a-half, the qualified overtime is calculated by dividing the total overtime pay by 3. For workers paid double-time, the total overtime pay is divided by 4. Alternatively, the premium can be calculated as the overtime hourly rate minus the regular hourly rate, multiplied by overtime hours worked.
Source: IRS — Notice 2025-69 (PDF)
What is Schedule 1-A?
Schedule 1-A (Form 1040) is a new IRS tax form created for the 2025 tax year to calculate and claim the four new deductions enacted by the One Big Beautiful Bill Act: No Tax on Tips (Part II), No Tax on Overtime (Part III), Car Loan Interest (Part IV), and Enhanced Deduction for Seniors (Part V). The total from Schedule 1-A is reported on Form 1040, line 13b.
Source: IRS — Schedule 1-A (Form 1040) (PDF)
Are Social Security and Medicare taxes still owed on overtime pay?
Yes. According to the IRS, the overtime deduction applies only to federal income tax. Overtime compensation remains fully subject to Social Security tax (6.2% on wages up to $176,100 for 2025) and Medicare tax (1.45% on all wages). Employers continue to withhold FICA taxes from all overtime compensation.
Source: IRS — One Big Beautiful Bill Act: Tax Deductions for Working Americans and Seniors
Does my state offer a no tax on overtime deduction?
State treatment varies. As of 2026, seven states are linked to the federal overtime deduction (Idaho, Iowa, Michigan, Montana, North Dakota, Oregon, South Carolina). Michigan is the only state that actively adopted it. Colorado, Maine, and the District of Columbia have formally decoupled. Several other states (Ohio, Pennsylvania) are considering their own legislation. Taxpayers should verify with their state tax agency.
Source: CBO — Estimated Budgetary Effects of P.L. 119-21 | State legislature websites (.gov)
What if my employer did not report overtime separately on my W-2 for 2025?
According to IRS FAQ Q7, for tax year 2025, employers are not required to separately report qualified overtime. If an employer did not provide this information, taxpayers may calculate their qualified overtime using methods described in IRS Notice 2025-69 and the Schedule 1-A instructions. Pay stubs, payroll software, and year-end statements can serve as documentation.
Source: IRS — FAQ Q7
Can salaried employees claim the overtime deduction?
It depends on the employee’s FLSA classification. According to the Department of Labor, salaried employees who are non-exempt from FLSA overtime requirements may qualify. Salaried employees classified as exempt (executive, administrative, professional exemptions) do not qualify, regardless of hours worked.
Source: DOL — Overtime Pay | IRS — FAQ Q2
Does overtime paid under state law only (not FLSA) qualify?
No. According to the IRS, only overtime compensation required under Section 7 of the Fair Labor Standards Act qualifies. Overtime mandated by state law (such as California’s daily overtime after 8 hours), union contracts, or voluntary employer policies is not deductible under this provision, unless the overtime also satisfies FLSA requirements.
Source: IRS — FAQ Q1
Can both the overtime deduction and the tips deduction be claimed on the same return?
Yes. According to IRS guidance, the overtime deduction and tips deduction are separate provisions, each with their own limits and eligibility rules. Both are claimed on Schedule 1-A (Form 1040) in different sections (Part II for tips, Part III for overtime). Tips earned during overtime hours cannot be applied toward the overtime deduction but may qualify for the tips deduction.
Source: IRS — Tax Tip 2026-06
What is the income limit for the overtime deduction?
The deduction begins to phase out at MAGI of $150,000 for single filers and $300,000 for married filing jointly. The deduction is reduced by $100 for every $1,000 above these thresholds. The deduction is fully eliminated at $275,000 MAGI (single) and $550,000 MAGI (joint).
Source: IRS — FAQ Q4
Is the no tax on overtime deduction permanent?
No. Under current law, the deduction is temporary, effective for tax years 2025 through 2028. Extension beyond 2028 would require passage of new legislation by Congress.
Source: IRS — One Big Beautiful Bill Act: Tax Deductions for Working Americans and Seniors
How does the safe harbor rule work for tax year 2025?
For tax year 2025 only, the IRS allows employers to use a safe harbor method that averages overtime compensation from the second half of the year (July through December 2025) to calculate qualified overtime for the full year. This accommodation was provided because the OBBBA was not enacted until July 4, 2025, midway through the tax year. Details are in IRS Notice 2025-69.
Source: IRS — Notice 2025-69 (PDF)
What W-2 reporting changes are coming for tax year 2026?
Beginning with tax year 2026, employers must separately report qualified overtime compensation using W-2 Box 12, Code “TT.” The IRS has released draft 2026 Form W-2 instructions reflecting this new requirement. Additionally, the 2026 Form W-4 includes a new worksheet (Section 1b) for overtime deduction withholding adjustments. Forms 1099-NEC and 1099-MISC will also be updated for separate overtime reporting.
Source: IRS — FAQ Q6
Do I need to itemize deductions to claim the overtime deduction?
No. According to the IRS, the overtime deduction is available to both taxpayers who itemize deductions on Schedule A and those who claim the standard deduction. The overtime deduction is claimed on Schedule 1-A, which is separate from Schedule A.
Source: IRS — One Big Beautiful Bill Act: Tax Deductions for Working Americans and Seniors
How does the overtime deduction apply to federal government employees?
According to the IRS, federal employees who are non-exempt under the FLSA (SF-50, Block 35, Code “N”) may qualify. The Office of Personnel Management (OPM) administers the FLSA for most federal employees and provides a fact sheet on computing FLSA overtime pay. Federal employees should contact their agency’s human resources office or payroll provider for assistance in determining qualified overtime compensation.
Source: IRS — FAQ Q3 | OPM — How to Compute FLSA Overtime Pay
Overtime Laws by State
View overtime regulations, state-specific overtime thresholds, and daily overtime requirements for all 50 states:
Official Government Sources
All information on this page is compiled exclusively from official government sources:
| Official Sources — “No Tax on Overtime” (OBBBA) | ||
|---|---|---|
| Source | Description | URL |
| IRS — OBBBA Tax Deductions | Overview of new deductions for working Americans | irs.gov |
| IRS — Overtime FAQ (FS-2026-01) | Detailed Q&A on qualified overtime compensation deduction | irs.gov |
| IRS — Tax Tip 2026-06 | How to take advantage of no tax on tips and overtime | irs.gov |
| IRS — Notice 2025-69 | Guidance for 2025 tax year tip and overtime deductions | irs.gov (PDF) |
| IRS — Notice 2025-62 | Employer penalty relief for 2025 reporting transition | irs.gov (PDF) |
| IRS — Schedule 1-A (Form 1040) | Tax form for additional deductions | irs.gov (PDF) |
| IRS — Form 1040 Instructions | Filing instructions including Schedule 1-A guidance | irs.gov (PDF) |
| DOL — FLSA Overtime | Department of Labor overtime pay information | dol.gov |
| DOL — Fact Sheet #14: FLSA Coverage | Who is covered by the FLSA | dol.gov |
| DOL — Handy Reference Guide to FLSA | Comprehensive FLSA overview | dol.gov |
| DOL — Overtime General Guidance | General overtime regulations | dol.gov |
| OPM — FLSA Overtime for Federal Employees | How to compute FLSA overtime for federal workers | opm.gov |
| CBO — Budgetary Effects of P.L. 119-21 | Official cost estimate of the OBBBA | cbo.gov |
| JCT — Revenue Effects (JCX-26-25R) | Detailed revenue estimates of OBBBA tax provisions | jct.gov |
| JCT — Overview of Federal Tax System 2025 | IRC Section 225 overtime deduction overview | jct.gov (PDF) |
| Public Law 119-21 (OBBBA) | One Big Beautiful Bill Act text | congress.gov |