No Tax on Overtime: How the Overtime Deduction Works (2025–2028)

The 2025 federal tax law (often called the One Big Beautiful Bill Act) created a temporary income-tax deduction for qualified overtime pay for tax years 2025 through 2028. It's not an exemption from withholding or payroll taxes — it's a deduction you claim on your federal return.

The key numbers

• Up to $12,500 per year ($25,000 for married couples filing jointly).
• Phases out for modified adjusted gross income over $150,000 ($300,000 joint).
• Available whether or not you itemize; you need a valid Social Security number, and married couples must file jointly.
• Social Security and Medicare taxes still apply to overtime pay.

What counts as "qualified overtime"

Only the premium part of overtime required by the federal FLSA — the "half" in time and a half. If you earn $20 an hour and work 10 overtime hours at $30, the qualified amount is 10 × $10 = $100, not $300. Overtime paid only because of a state law, a union contract or company policy (for example, daily overtime under a state rule) may not qualify. Check the IRS guidance for your situation.

Example

A worker earning $25/hour averages 6 overtime hours a week for 50 weeks: 300 hours × $12.50 premium = $3,750 deduction. In the 12% bracket that's roughly $450 less federal income tax.

For 2025, employers didn't have to report qualified overtime separately, so workers calculated it themselves (Schedule 1-A instructions). From 2026, employers are expected to report it on Form W-2. Either way, your own record of overtime hours lets you check the number. This page is general information, not tax advice.