No Tax on Overtime: 2026 Rules, Limits & the FLSA Trap

What is the no tax on overtime deduction?

It's an OBBBA deduction letting eligible workers subtract their qualified overtime from taxable income — up to $12,500 ($25,000 on a joint return) — for tax years 2025 through 2028. The catch is in the word 'qualified': only the FLSA premium portion counts, not your entire overtime paycheck.

Like the tips break, this is a temporary, capped income-tax deduction, not an exemption — your overtime is still wages and still subject to Social Security and Medicare. What you can deduct at tax time is the qualified overtime premium, up to the cap, for 2025 through 2028. And the single most misunderstood thing about it is what "qualified overtime" actually means, which is the next section — get that wrong and you'll massively overestimate the benefit.

Because the deductible amount is only a slice of your overtime pay, the honest way to size it is to compute the premium, not the paycheck. The No Tax on Overtime calculator does exactly that, and the take-home paycheck calculator shows where it lands in your net pay.

Why is only half my overtime deductible?

Because the law deducts only the FLSA premium — the extra amount above your regular rate — not the base pay underneath it. Overtime is paid at 1.5× your regular rate; the deductible part is the 0.5× 'half', not the full 1.5×. On a time-and-a-half hour, at most one third of the payment qualifies.

This is the trap that will disappoint a lot of workers, so it's worth being precise. Under the Fair Labor Standards Act, overtime is paid at one and a half times your regular rate. OBBBA only lets you deduct the part that exceeds your regular rate — the "half" in time-and-a-half. The other portion is the base rate you'd have earned on any hour, and it's taxed like ordinary wages.

Put in numbers: a worker with a $30 regular rate is paid $45 for an overtime hour. Of that $45, only $15 — the premium above the $30 base — is qualified overtime compensation. The remaining $30 is ordinary wages that happened to be earned after hour 40. Because the premium is 0.5× and the payment is 1.5×, the deductible share of any time-and-a-half payment can never exceed one third.

Who qualifies — and who is exempt?

Only FLSA-required overtime qualifies, so you generally must be a non-exempt employee owed statutory overtime. Salaried professional, administrative and executive staff who are FLSA-exempt don't qualify — their extra pay for extra hours is contractual, not statutory, and none of it is deductible.

The deduction is tied to overtime the FLSA requires. Non-exempt hourly workers who get time-and-a-half past 40 hours are the core group. Workers classified as exempt — many salaried professional, administrative, and executive roles above the FLSA salary threshold — aren't legally owed FLSA overtime, so even if they work extra hours and get paid more, that pay isn't "qualified overtime" and can't be deducted. Whether a specific job is exempt is a Department of Labor question, not a choice.

The same income limits as the tips deduction apply: the benefit phases out above $150,000 of MAGI for single and head-of-household filers, and $300,000 for joint filers. A valid Social Security number is generally required, and married taxpayers generally must file jointly to claim it.

What are the overtime deduction limits for 2026?

The qualified overtime premium is capped at $12,500 for single filers and $25,000 for joint filers, for 2025 through 2028. The cap shrinks by $100 for every $1,000 of MAGI above $150,000 ($300,000 joint), reaching zero at $275,000 of MAGI for singles and $550,000 for couples.

Two ceilings bound the deduction: the amount of premium you actually earned, and the statutory cap. The cap is $12,500 (single/HoH) or $25,000 (joint), and — like the tips cap — it phases out above the income thresholds at $100 per $1,000 of MAGI. Here's the single-filer cap across income levels:

How is overtime reported on my W-2?

Employers must file information returns and give you a statement showing the total qualified overtime compensation paid — the premium amount, already separated from your base wages. That figure is what flows to your deduction, so you don't have to compute the FLSA premium yourself.

The reporting mechanics mirror the tips rules. Employers and other payors file information returns with the IRS (or SSA) and furnish you a statement showing the total amount of qualified overtime compensation paid during the year. Because the employer is reporting the premium portion specifically, the hard part — separating the deductible half from the base wages — is done for you; you claim the reported figure, subject to the cap and phase-out.

As with tips, transition relief applies to the 2025 tax year while the reporting systems catch up, and 2026 should be the first fully normal year. And as with tips, whether your state also honors the deduction is a separate question — check the OBBBA State Conformity Tracker for your state.