Overtime Tax Deduction 2026: How the New Premium-Pay Deduction Works

"No tax on overtime" was the sibling promise to "no tax on tips" in the 2026 tax law — the One Big Beautiful Bill Act, signed July 4, 2025. And like its sibling, the name oversells it. You don't get all your overtime tax-free. What the tax law actually created is a deduction for the premium half of your overtime pay — the extra 50% your employer pays above your regular rate. Here's how it works, who qualifies, and how to claim it.

The short version: For tax years 2025 through 2028, eligible workers can deduct the FLSA premium portion of overtime pay — up to $12,500 per year for single filers ($25,000 for married couples filing jointly). Only the "half" in time-and-a-half counts. Payroll taxes still apply, and the deduction phases out above $150,000 of income ($300,000 joint).

Only the premium counts — the "half" in time-and-a-half

This is the detail most people miss. Under the Fair Labor Standards Act (FLSA), non-exempt workers earn 1.5× their regular rate for hours over 40 in a week. The new tax-law deduction covers only the 0.5× premium — the extra half — not the full 1.5×.

Example: you earn $20/hour and work 10 overtime hours in a week. Your overtime pay is $300 (10 × $30). The deductible premium is only $100 (10 × the $10 premium). The other $200 is taxed exactly as before. Across a full year, 10 overtime hours a week at that rate gives you about $5,200 of deductible premium pay — real money, but roughly a third of what "tax-free overtime" suggests.

Why structure it this way? Congress wanted to reward the extra effort without subsidizing the base wages. Whatever the motive, do the math on the premium only — that's where many workers overestimate the benefit.

The caps: $12,500 single, $25,000 joint

The deduction is capped at $12,500 per tax return for single filers, head of household, and married filing separately, and $25,000 for married couples filing jointly. Unlike the tips deduction (one $25,000 cap per return regardless), the overtime cap doubles for joint filers — a small but meaningful difference for two-earner households where both spouses work overtime.

Most hourly workers won't hit the cap. At a $15/hour premium ($30/hour regular rate), you'd need about 833 overtime hours a year — 16 hours a week, every week — to reach $12,500. The cap binds mainly for high earners in trades, healthcare, and manufacturing with heavy overtime.

Who qualifies

The deduction is for employees who receive overtime compensation required under the FLSA — i.e., non-exempt workers whose employers are legally required to pay the time-and-a-half premium. That covers most hourly workers in retail, hospitality, healthcare support, manufacturing, warehousing, construction, and similar roles.

Who generally does not qualify:

Salaried exempt workers — if you're exempt from FLSA overtime rules, there's no FLSA premium to deduct, even if your employer voluntarily pays extra for long hours.
Overtime not required by the FLSA — state-law-only overtime, double-time premiums, holiday pay premiums, and shift differentials that aren't FLSA overtime don't count. Only the federally required premium portion qualifies.
Self-employed workers — you can't pay yourself overtime; the deduction is for employees.

If you're unsure whether you're FLSA non-exempt, check with your HR department or the Department of Labor's classification guidance — it determines everything here.

W-2 reporting: what your employer has to do

For the 2026 tax year, employers must separately report the amount of FLSA premium pay on your W-2 (in Box 12 with a dedicated code). This is new — W-2s weren't originally designed to break out the premium — so there's real implementation risk in year one. When your W-2 arrives in January 2027, check that the premium amount is actually listed. If it's missing or looks wrong, ask your payroll department before you file; you can only deduct what you can document.

Keep your own records too: pay stubs showing overtime hours and rates are your backup if the W-2 is wrong.

The income phaseout

Like the tips deduction, the overtime deduction phases out for higher earners: it begins shrinking above $150,000 of modified adjusted gross income for single filers and $300,000 for joint filers. The phaseout is measured before the deduction itself, so the deduction can't pull you under the threshold. Most overtime-eligible hourly workers earn well under these limits, but highly paid trades workers with big overtime years should check.

What still gets taxed

The base overtime wages — the 1.0× portion of your overtime pay is taxed normally as ordinary income.
Payroll taxes — Social Security and Medicare taxes apply to the full overtime amount, premium included. The deduction only reduces federal income tax.
State taxes — unless your state conforms to the new federal deduction, your state taxes the premium too.
Non-FLSA premiums — double-time, holiday premiums, and shift differentials get no deduction.

A worked example

Take Denise, a warehouse worker earning $22/hour, single, working 8 overtime hours most weeks. Her weekly premium: 8 hours × $11 = $88. Over 50 weeks, that's $4,400 of deductible premium pay. In the 12% bracket, the deduction saves her about $528 in federal income tax. Not life-changing — but it's $528 she keeps for hours she already worked.

Now take a union electrician earning $45/hour with 15 overtime hours a week, married filing jointly. Annual premium: 15 × $22.50 × 50 = $16,875 — under the $25,000 joint cap. In the 22% bracket, that's about $3,713 in federal income tax saved. For heavy-overtime households, the deduction is genuinely significant.

How to claim it

Verify you're FLSA non-exempt and your overtime is federally required premium pay.
Check your W-2 when it arrives — confirm the premium amount is reported in Box 12.
Claim it on Schedule 1-A, the new form the IRS created for the 2026 tax law's above-the-line deductions. Like the tips deduction, it's above-the-line, so it works whether you itemize or take the standard deduction.
Consider adjusting your 2026 W-4 — the IRS redesigned the W-4 for 2026, and workers with predictable overtime can tune withholding so the savings arrive in paychecks rather than only at refund time.

The 2028 sunset

The overtime deduction expires after the 2028 tax year along with the other individual provisions of the 2026 tax law, unless Congress extends it. Overtime worked in 2029 falls back under the old rules.

Frequently asked questions

Does double-time count?

Only the FLSA-required premium (the 0.5×) qualifies. The extra premium in double-time beyond time-and-a-half is not deductible.

I'm salaried but non-exempt. Do I qualify?

If you're genuinely non-exempt under the FLSA and receive FLSA overtime premium pay, yes — salary vs. hourly isn't the test; exempt status is.

What if my employer doesn't report the premium on my W-2?

Talk to your payroll department first — they're required to report it for 2026. Keep pay stubs as backup documentation either way.

Can I claim both the overtime and tips deductions?

Yes, if you qualify for both (e.g., a tipped worker who also earns FLSA overtime). They're separate deductions with separate caps.

Does my state offer this deduction?

Only if your state conforms to the federal provision. Many states haven't — check your state's tax agency.

The overtime deduction is one of four new worker-focused deductions in the 2026 tax law. Tipped workers should read our guide to how the no-tax-on-tips deduction works ($25,000 cap, 2025–2028). If you're self-employed rather than a W-2 employee, the new $2,000 1099 threshold for 2026 changes your paperwork — and workers buying a car should check the car loan interest deduction for US-assembled vehicles.

For IRS guidance and updates, see IRS.gov and the IRS Newsroom; the Tax Foundation and Kiplinger's tax coverage both track this provision as filing season approaches.