Last updated: September 26, 2026 · By the Flex Tax and Consulting Group team
The 2025 federal tax law created a new “no tax on overtime” deduction. For tax years 2025 through 2028, eligible employees can deduct the premium portion of their FLSA-required overtime pay, up to $12,500 per year ($25,000 on a joint return). The deduction shrinks once income passes $150,000 ($300,000 joint), and it is not available to self-employed people. Here is how it works, who qualifies, and what changes on your 2026 W-2.
Key takeaways
- Only the “half” in “time-and-a-half” counts, not your full overtime pay.
- Maximum deduction: $12,500 (single) / $25,000 (married filing jointly), for 2025–2028.
- The limit phases down above $150,000 of modified AGI ($300,000 joint).
- You don’t need to itemize. The deduction is claimed on Schedule 1-A.
- Starting with 2026 pay, qualifying overtime is reported on your W-2 in box 12, code TT.
- Overtime is still taxable wages for Social Security, Medicare and withholding. The deduction only lowers federal income tax.
What counts as “qualified overtime compensation”?
The deduction applies only to overtime that the Fair Labor Standards Act (FLSA) requires your employer to pay, generally hours over 40 in a workweek for non-exempt employees. Only the premium portion qualifies. If your regular rate is $40 an hour and you are paid $60 for an overtime hour, the qualifying amount is the $20 premium, not the full $60.
Several types of pay do not qualify:
- Overtime paid only because of state law (for example, California daily overtime) or a union contract, unless it is also required by the FLSA
- Bonuses, shift differentials and other extra pay that isn’t FLSA overtime premium
- Income from self-employment or independent-contractor work (Form 1099 income)
- Pay for salaried employees who are exempt from FLSA overtime rules
Who qualifies?
- Employees who are non-exempt under the FLSA and receive FLSA overtime
- Married couples must file jointly to claim the deduction
- You (and your spouse, if filing jointly) need a valid Social Security number valid for employment, included on the return
Many high-income salaried professionals, such as managers, engineers and consultants classified as exempt, generally do not receive FLSA overtime, so this deduction usually won’t apply to them.
How much can you deduct? Limits and phase-out
| Filing status | Maximum deduction | Phase-out begins (MAGI) |
|---|---|---|
| Single / head of household | $12,500 | $150,000 |
| Married filing jointly | $25,000 | $300,000 |
| Married filing separately | Not allowed | — |
Above the threshold, the maximum is reduced by $100 for every $1,000 of modified AGI over the limit. In practice the deduction phases out completely at about $275,000 of MAGI for single filers and $550,000 for joint filers. You can never deduct more than the qualifying overtime premium you actually received.
Keep in mind that this is a deduction, not a credit. It reduces taxable income, so your actual tax savings depend on your bracket and will be less than the deduction amount. The deduction is federal; your state may not follow it.
How to claim it
- Tax year 2025: Employers weren’t required to report qualifying overtime separately, so many employees will rely on pay stubs, a separate employer statement or box 14 of the W-2 to support the amount.
- Tax year 2026 and later: Employers must report the full qualifying overtime premium on Form W-2, box 12, code TT. The IRS says employees generally may claim the deduction only for amounts reported there.
- The deduction is figured on Schedule 1-A and flows to Form 1040. It’s available whether you itemize or take the standard deduction.
Common mistakes to avoid
- Deducting your entire overtime pay instead of only the premium portion
- Counting state-only overtime, bonuses or 1099 income
- Filing separately while married (the deduction isn’t allowed)
- Forgetting the income phase-out, which can reduce or eliminate the deduction
- Expecting lower payroll withholding or FICA taxes. Overtime is still fully taxed as wages during the year.
If your 2026 W-2 doesn’t show an amount in box 12, code TT and you believe you earned FLSA overtime, ask your employer’s payroll team whether a corrected W-2 (Form W-2c) is needed.
FAQ
Is overtime now tax-free?
Not entirely. Overtime is still included in wages and subject to Social Security, Medicare and withholding. Eligible employees can deduct the premium portion, up to the annual limit, when calculating federal income tax.
Do I have to itemize to get the overtime deduction?
No. It’s claimed on Schedule 1-A and is available to taxpayers who take the standard deduction.
Can self-employed people or contractors claim it?
No. It applies only to FLSA overtime paid to employees.
Does California overtime qualify?
Only the portion that is also required under the federal FLSA. Overtime paid solely because of California’s daily-overtime rules does not qualify.
How long does the deduction last?
It applies to tax years 2025 through 2028 unless Congress extends it.
Related reading
- Selling RSUs or ESPP Shares Without a Tax Plan: How to Avoid Overpaying the IRS
- Buying a Home Before vs. After OBBBA: How the Rules Change for High-Income Individuals
- Case Study: Does an S-Corp Actually Save Taxes If You Have a Full-Time Job?
Sources
- IRS: Questions and answers about the new deduction for qualified overtime compensation
- IRS: What to know about the No Tax on Overtime deduction
Not sure how the new deductions apply to your 2026 return?
This article provides general information only and is not tax or legal advice. Tax outcomes depend on individual facts and circumstances. Contact us about your specific situation.