Overtime Pay Deduction: Rules and Examples (2025-2028)

The overtime pay deduction lets eligible employees deduct the overtime premium required by the Fair Labor Standards Act (FLSA), usually the “half” in time-and-a-half, for tax years 2025 through 2028. The limit is $12,500, or $25,000 on a joint return, reduced by $100 for each full $1,000 of modified adjusted gross income (MAGI) above $150,000 ($300,000 joint).

“No tax on overtime” does not mean all overtime pay is tax-free. The regular-pay part of your overtime remains taxable. The deduction does not change the usual Social Security and Medicare tax rules.

This guide explains who qualifies, which part of overtime counts, how to calculate the deduction, and what changes on 2026 Forms W-2.

Updated October 30, 2026. Reviewed against the IRS overtime FAQs released August 6, 2026 (FS-2026-13).

Watch the overtime pay deduction lesson

Prefer to learn by watching? Professor Farhat explains the overtime pay deduction in this video. Watch it first, then work through the examples below. Enrolled students can continue with the full Deductions for Qualified Overtime Pay lesson in the Individual Income Tax Course (Tax I), or you can watch the video on YouTube.

What is the overtime pay deduction, and who qualifies?

The One, Big, Beautiful Bill Act (Public Law 119-21) created a temporary deduction for qualified overtime compensation under Internal Revenue Code section 225. It is taken after adjusted gross income (AGI) and is available with either the standard deduction or itemized deductions. It reduces taxable income; it is not an exclusion from wages or a dollar-for-dollar tax credit.

Only the qualifying premium counts

For ordinary time-and-a-half pay, the qualifying amount is the extra half of the regular rate required by the Fair Labor Standards Act (FLSA). The regular wage component of those hours remains ineligible. Calling a payment “overtime” on a pay stub doesn’t make it qualified overtime.

• The worker must be covered by, and not exempt from, the FLSA overtime rules. Exempt employees, such as most executive, administrative, professional, and outside sales staff, don’t earn qualified overtime even if their employer pays them overtime anyway. An employee who owns at least 20% of the business and actively helps manage it is generally treated as exempt.
• Overtime paid only because of state law, a union contract, an employment agreement, or company policy does not qualify. Only the amount the FLSA itself requires counts.
• The employee who received the qualified overtime needs a Social Security number that is valid for employment and issued before the return’s due date, including extensions. Married taxpayers must file jointly. If both spouses received qualified overtime, both need valid numbers on the return.

These distinctions matter when reviewing weekend premiums, contractual overtime, or double-time pay. Consult the updated IRS overtime compensation FAQs (FS-2026-13) for the applicable eligibility and reporting rules.

How is qualified overtime figured?

Under the general FLSA method used in this article, qualified overtime is figured one workweek at a time. A workweek is a fixed, recurring 168-hour period (seven straight 24-hour days) set by the employer. Hours can’t be averaged across two or more weeks.

For most hourly employees, the weekly formula is shown below. Alternative FLSA computation methods and special rules for certain federal employees may apply; see the IRS FAQs for those situations.

Hours worked over 40 in the workweek × one-half × FLSA regular rate = qualified overtime for that week

The FLSA regular rate isn’t always your base hourly wage. It includes most pay for the week, such as nondiscretionary bonuses and shift differentials, divided by the total hours worked.

Quick check: Maria earns $20 an hour, works 45 hours, and earns a $90 production bonus that week. Her regular rate is ($900 + $90) ÷ 45 = $22. Her qualified overtime is 5 × one-half × $22 = $55, not the $50 you’d get from her $20 base wage.

Paying more than the FLSA requires doesn’t raise the deduction. Say an employer pays double time, $44 an hour, for 8 hours over 40 to a worker whose regular rate is $22. The worker receives $352 for those hours, but only 8 × $11 = $88 is qualified overtime.

How much overtime can you deduct? Limits and income phase-out

The joint limit applies to the couple’s combined qualified overtime, not to each spouse separately. If one spouse earned all of the overtime, that spouse’s overtime can use the whole $25,000. These limits apply during the temporary 2025–2028 period.

MAGI means modified adjusted gross income. For this deduction, start with AGI and add back the excluded income listed in Part I of IRS Schedule 1-A, such as the foreign earned income and housing exclusions from Form 2555 and excluded income from Puerto Rico or American Samoa. Do not substitute salary or take-home pay for MAGI. The overtime deduction itself doesn’t reduce MAGI, because it is taken after AGI.

The deduction decreases by $100 for each full $1,000 of MAGI above the applicable threshold. Apply the annual cap first, then subtract the phase-out reduction. The result cannot fall below zero.

How to calculate the overtime pay deduction: 3 examples

For standard FLSA time-and-a-half compensation, begin with the qualifying premium. Then apply the cap and phase-out to determine the final deduction.

Qualified overtime compensation = qualifying premium per hour × qualifying overtime hours.

Final deduction = the smaller of qualified compensation or the annual cap, minus the phase-out reduction, with a minimum of zero.

Example 1: Separate wages from the qualifying premium

Assume an eligible single employee earns $24 per hour and receives $36 per hour for 100 qualifying overtime hours. The employee’s MAGI is below $150,000, and all other requirements are met.

The overtime pay deduction is $1,200, not the entire $3,600 received for overtime hours. The remaining $2,400 is regular compensation for those hours. Payroll taxes still follow the usual rules for the full wages.

A deduction also differs from tax savings. If the full $1,200 reduces income otherwise taxed at a hypothetical 22% marginal rate, the federal income tax reduction is $264 ($1,200 × 22%), assuming no other tax interactions.

Example 2: Apply the income phase-out

Now assume an eligible single filer has $14,000 of qualified overtime compensation and MAGI of $165,500. Calculate the deduction in this order:

• Apply the cap: the smaller of $14,000 or $12,500 is $12,500.
• Find excess MAGI: $165,500 − $150,000 = $15,500.
• Count full $1,000 increments: $15,500 ÷ $1,000 = 15.5; round down to 15.
• Calculate the reduction: 15 × $100 = $1,500.
• Subtract the reduction: $12,500 − $1,500 = $11,000.

This example shows why the annual cap alone does not determine the answer. Qualification, the cap, and the phase-out are separate steps.

Example 3: A joint return where only one spouse earns overtime

Jordan and Sam file a joint 2026 return with MAGI of $318,700. Jordan’s Form W-2 shows $19,000 in box 12, code TT, and Jordan has a valid Social Security number. Sam earned no overtime.

1. Apply the cap: the smaller of $19,000 or $25,000 is $19,000. Jordan isn’t held to $12,500, because the joint limit covers the whole return.
2. Find excess MAGI: $318,700 − $300,000 = $18,700.
3. Count full $1,000 increments: $18,700 ÷ $1,000 = 18.7; round down to 18.
4. Calculate the reduction: 18 × $100 = $1,800.
5. Subtract the reduction: $19,000 − $1,800 = $17,200.

Their overtime pay deduction is $17,200. On an exam, watch for answer choices that cap Jordan at $12,500 or round 18.7 up to 19.

Want more practice with problems like these? The Individual Income Tax Course (Tax I) covers taxable income and deductions, and you can try lessons first in the Farhat Lectures Free Sample Course.

How do you claim the overtime pay deduction?

Figure the deduction on Schedule 1-A (Form 1040), Part III. On the 2025 Form 1040, the Schedule 1-A total goes on line 13b, below AGI. Keep your pay stubs and Forms W-2, and use the form and instructions for the tax year you’re claiming, not the year you file in.

For 2025, Notice 2025-69 lets employees claim the deduction even if their employer did not report qualified overtime separately, using the calculation methods the notice describes. That relief applies to 2025 only.

Beginning with tax year 2026, employers must report the total qualified overtime they paid on Form W-2, box 12, code TT. In rare cases, a payor reports it on Form 1099-NEC, box 1d, or Form 1099-MISC, box 14 instead, when the worker is an employee for FLSA purposes but an independent contractor for federal tax purposes. The employer reports the full amount, even if it is more than you can deduct, so you still apply the cap and the phase-out on Schedule 1-A.

For 2026 through 2028, qualified overtime must be separately reported on Form W-2, box 12, code TT, or on the applicable Form 1099 in the rare circumstances described above. If your employer left it out or reported too little, ask for a corrected Form W-2c. A substitute W-2 (Form 4852) does not count. If code TT is too high, use only the qualified overtime you were actually paid.

Your employer still withholds income tax on overtime pay. If you want less withheld during the year, give your employer a new Form W-4. The 2026 Form W-4 lets you include your expected overtime deduction in Step 4(b).

Overtime pay deduction: key takeaways

• Only the overtime premium the FLSA requires counts, usually the “half” in time-and-a-half.
• The limit is $12,500 per return, or $25,000 on a joint return.
• The deduction drops by $100 for each full $1,000 of MAGI above $150,000 ($300,000 joint). A full $12,500 deduction is gone at $275,000 of MAGI, and a full $25,000 joint deduction is gone at $550,000.
• It’s taken after AGI, so you can claim it with the standard deduction or with itemized deductions.
• For 2026 through 2028, qualified overtime must be separately reported on Form W-2, box 12, code TT, or, in rare qualifying cases, on the applicable Form 1099.
• The deduction does not change the usual Social Security and Medicare tax rules.
• The deduction is temporary and covers tax years 2025 through 2028.

Study tips for CPA, EA, and tax students

When solving an overtime pay deduction problem, identify the filing status and year first. Next, distinguish total overtime wages from the qualifying premium. Finally, apply the annual cap and MAGI phase-out. Working in this order keeps you from mixing up the rules.

• Do not deduct all time-and-a-half wages.
• Do not treat the deduction as an AGI adjustment or tax credit.
• Do not give each spouse a separate $25,000 joint-return limit.
• Do not assume that a federal deduction changes state tax treatment.
• Do not use the base hourly wage when the FLSA regular rate is higher because of bonuses or shift differentials.
• For 2026 through 2028, verify separate reporting on Form W-2, box 12, code TT, or on the applicable Form 1099 in a rare qualifying case.

Studying other individual deductions? Compare these rules with our guide to the charitable contribution deduction.

Review taxable income and deductions in Farhat Lectures’ Individual Income Tax Course (Tax I). For additional exam preparation, explore the REG supplemental course. Exam timing matters here. On the CPA Exam, One Big Beautiful Bill Act provisions with 2024 and 2025 effective dates, including this deduction, became eligible for testing on REG and TCP starting July 1, 2026. EA candidates should check the current IRS Special Enrollment Examination candidate bulletin for the tax year their testing window covers. For what’s changing on the exam next year, see our guide to CPA Exam changes in 2027.

Overtime pay deduction: frequently asked questions

Does “no tax on overtime” eliminate every tax on overtime?

No. The provision provides a limited federal income tax deduction for qualifying compensation. It does not remove all overtime wages from income or eliminate Social Security and Medicare taxes.

Can I claim the deduction with the standard deduction?

Yes. Eligible taxpayers may claim it whether they use the standard deduction or itemize. It is a separate deduction after AGI.

Does double-time pay qualify in full?

No. Under the general FLSA method for most employees, only half the regular rate for qualifying hours over 40 in a workweek counts. Voluntary double-time pay does not increase that amount. Special FLSA computation rules may apply.

Is the deduction permanent?

No. Under the current provision, it applies to tax years 2025 through 2028.

What should I review before calculating my deduction?

Confirm FLSA eligibility, filing status, MAGI, and the applicable year’s reporting requirements. Then use Schedule 1-A, Part III. See the claiming instructions above for the distinction between 2025 relief and 2026–2028 reporting.

Can I deduct overtime that isn’t shown on my W-2?

For 2026 through 2028, separate reporting is required: normally Form W-2, box 12, code TT, or, in rare qualifying cases, Form 1099-NEC, box 1d, or Form 1099-MISC, box 14. Request a corrected form if needed. Different relief applies for 2025; see the reporting section.

Does the overtime deduction lower my AGI?

No. It is taken after AGI, so it lowers taxable income but not AGI. It also doesn’t reduce the MAGI used to figure its own phase-out.

Do salaried employees qualify?

Yes, if they are covered by and nonexempt under the FLSA. Receiving a salary does not by itself establish exemption; the applicable exemption requirements must be met.

If only one spouse earns overtime, can we still use the $25,000 limit?

Yes, on a joint return. The $25,000 limit covers the couple’s combined qualified overtime, so one spouse’s overtime can use all of it. The spouse who received the overtime needs a valid Social Security number.

About the instructor

Professor Mansour Farhat, DBA, CPA, CIA, MAcc, founded Farhat Lectures to help students understand accounting and prepare for professional examinations. His lessons combine explanations with worked examples and practice opportunities.

Build your foundation with the Farhat Lectures Free Sample Course.

This article is educational and does not replace advice based on an individual taxpayer’s circumstances.