No Tax on Overtime: Calculator and Guide
The Working Families Tax Cuts law lets you deduct the premium portion of qualified overtime compensation — up to $12,500 per return ($25,000 married filing jointly). It is a deduction from taxable income, not an exemption: overtime pay is still subject to Social Security and Medicare tax, and only the pay above your regular rate qualifies.
Sources: IRS — Q&A on the deduction for qualified overtime compensation · IRS — Schedule 1-A, Additional Deductions
Estimate your overtime deduction
This is a deduction from taxable income, not a refund of that amount. Your actual tax saving equals the deduction × your marginal rate. Only FLSA-required overtime counts, and it must be reported on your W-2 (box 12, code TT starting tax year 2026) or 1099.
What counts as qualified overtime
- Only overtime required under section 7 of the Fair Labor Standards Act (FLSA) qualifies.
- Only the premium portion counts — for time-and-a-half pay, the 0.5× above your regular rate.
- Overtime paid only under state law, contracts, or company policy does not qualify.
- Must be reported on a W-2, 1099, or equivalent statement.
- You need a Social Security number; if married, you must file jointly.
Limits and phase-out
- Cap: $12,500 per return; $25,000 for joint filers.
- Phase-out starts when MAGI exceeds $150,000 ($300,000 joint).
- Available whether you itemize or take the standard deduction.
- Claimed on Schedule 1-A (Part III), attached to Form 1040.
How it shows up on your W-2
For tax year 2025, employers were not required to report qualified overtime separately — it may appear in box 14 or on a separate statement, and the IRS provided transition relief and worksheets in the Schedule 1-A instructions. Starting in tax year 2026, employers report qualified overtime compensation on Form W-2 in box 12 with code TT (and on 1099-MISC box 14 or 1099-NEC box 1d for non-employees). You cannot deduct overtime that is not included in that figure.
Worked example
You earn $25/hour and work 8 hours of time-and-a-half overtime per week for 40 weeks. The qualified portion is $25 × 0.5 × 8 × 40 = $4,000. With MAGI under the phase-out threshold, your deduction is $4,000. At a 22% marginal rate, that is about $880 less federal income tax.