No, overtime pay is not tax-free. It is still taxable wages. For tax years 2025 through 2028 you may deduct the premium part of overtime that federal law requires, the "half" in time-and-a-half, up to $12,500 ($25,000 on a joint return). The deduction is taken after AGI and phases out at higher incomes.
What counts as qualified overtime
The IRS defines qualified overtime compensation as overtime that section 7 of the Fair Labor Standards Act (FLSA) requires an employer to pay, to the extent it exceeds your regular rate. If you are paid one and one-half times your regular rate for an hour of overtime, the extra half is the qualified part.
That has three practical effects:
- Only FLSA overtime-eligible employees qualify. Many salaried managers and professionals are exempt from FLSA overtime. Overtime they receive under a contract or union agreement does not count, whatever the pay stub calls it.
- Pay above what the law requires does not count. If your employer pays double time, only the half the FLSA requires is qualified.
- The regular-rate part is not deductible. You still pay tax on your normal hourly pay for those hours.
Whether you are covered by and not exempt from the FLSA depends on your job duties, pay and occupation. The U.S. Department of Labor explains the tests, and your employer's payroll office can tell you how you are classified.
The limits at a glance
| Item | Single or head of household | Married filing jointly |
|---|---|---|
| Maximum deduction | $12,500 | $25,000 |
| Reduction begins when modified AGI is over | $150,000 | $300,000 |
| Years it applies | 2025 through 2028 | 2025 through 2028 |
Modified AGI starts with your adjusted gross income and adds back certain excluded income. Under the law the deduction is reduced by $100 for each $1,000 of modified AGI above the threshold. See how to calculate adjusted gross income.
Example (invented numbers, tax year 2025)
Maria is single, paid $24 an hour, and worked 150 overtime hours in 2025 at $36 an hour (time and a half). The premium on each overtime hour is $12, so her qualified overtime is 150 x $12 = $1,800. Her modified AGI is well under $150,000, so she deducts the full $1,800. If her top federal rate is 12 percent, the deduction lowers her federal income tax by about $216. She still pays tax on the other $3,600 of her overtime-hour pay (150 x $24), because that part is her regular rate.
How to find your number
For 2025, employers and other payers were not required to report qualified overtime separately on Forms W-2, 1099-NEC or 1099-MISC. Some employers chose to show it in box 14 of Form W-2 or on a separate statement. If you received nothing, the IRS says to use the Schedule 1-A instructions to work out the amount, and your pay stubs and time records are the evidence. For 2026 and later years, employers must report qualified overtime separately, so the number should arrive with your year-end forms.
How to claim it
The deduction is figured on Schedule 1-A and carried to Form 1040. It is an adjustment taken after AGI, so it does not change your AGI. See standard vs. itemized deductions, because you get it either way.
Common mistakes
- Deducting total overtime pay instead of only the premium portion.
- Counting overtime paid to an FLSA-exempt employee.
- Counting extra premium pay beyond what the FLSA requires, such as double time or holiday premiums that are not overtime.
- Filing separately when married, which removes the deduction.
- Forgetting that the cap is per return, not per job.
- Believing it removes Social Security and Medicare tax. It does not.
What to do next
Gather your 2025 pay stubs, total the overtime hours and the extra half-time pay, and check whether your employer separately reported the amount. Then confirm your filing status and Social Security number rules before you complete Schedule 1-A. If you changed jobs, worked in several states or had a mix of hourly and salaried work, a CPA can help confirm what qualifies. Our guide to tips, overtime, seniors and car loans compares all four deductions, and the tips and overtime reporting guide covers the employer side. More answers are in Tax questions answered.
Frequently asked questions
Is overtime income taxable?
Yes. Overtime is wages. The new deduction lowers your taxable income by the qualified premium amount, but the pay is still reported and subject to Social Security and Medicare tax.
Do I get the deduction if I am salaried?
Only if you are FLSA overtime-eligible and your overtime is required by the FLSA. Many salaried employees are exempt, so their overtime does not qualify.
Can I claim it if I am married filing separately?
No. If you are married, you and your spouse must file a joint return to claim the deduction, and each spouse with qualified overtime needs a valid Social Security number.
Does it apply after 2025?
It applies for tax years 2025 through 2028. From 2026, employers must report qualified overtime separately.
Do I need to itemize?
No. You can take it with the standard deduction or with itemized deductions.
Official sources
- IRS: What to know about the No Tax on Overtime deduction
- IRS: Questions and answers about the new deduction for qualified overtime compensation
- IRS: Schedule 1-A (Form 1040), 2025
- Public Law 119-21 (One Big Beautiful Bill Act)
This page is a plain-language summary. The official source controls if there is any difference.
General information only, not tax, legal or accounting advice for your situation. Rules, limits and deadlines change; confirm the current rules with the official source or a qualified professional before you act. Reading this page does not create a professional relationship with CPA Tax Payroll and Accounting Corp.