The Federal Overtime Tax Deduction (2025-2028)
"No tax on overtime" is a deduction, not an exemption, and it covers less of your overtime pay than most people assume. Here is exactly what qualifies and how to estimate it.
What qualifies
Only the premium portion of overtime that the federal Fair Labor Standards Act requires: hours over 40 in a workweek × one-half your regular rate. If you earn $20/hour and work 50 hours, your overtime pay is $300 (10 h × $30), but the deductible amount is $100 (10 h × $10) — the "half" in time-and-a-half.
Does not qualify: state-only daily overtime (California's 8-hour rule, Alaska, Nevada, Colorado), double time beyond the FLSA premium, premiums required only by a union contract or employer policy, and any overtime paid to an employee who is FLSA-exempt.
Limits
Available whether or not you itemize. Married taxpayers must file jointly. SSNs required for everyone on the return.
Estimate your deduction
Why your paycheck didn't change
Withholding tables were not changed for this deduction. Your employer still withholds income tax on overtime as before; you get the benefit when you file, as a reduction in taxable income. You can submit a new Form W-4 to lower withholding if you prefer the money during the year. Social Security and Medicare taxes still apply to all overtime pay — the deduction is for federal income tax only, and most states have not conformed.
What your employer must do
For 2026 wages, employers report the qualified overtime amount in Box 12 of Form W-2 using code TT. For 2025, employers were not required to report separately, and the IRS allowed employees to estimate from pay records (Notice 2025-69). From 2026 on, you may claim only what the W-2 shows; if it is understated, you need a corrected W-2 from the employer.
Sources
- IRS: Guidance for individuals who received tips or overtime (TY2025)
- EY Tax News: IRS updates 2026 guidance on the overtime deduction
IRC §225 as added by Pub. L. 119-21. As of October 25, 2026.