"No tax on overtime" is a federal income tax deduction, not an exemption. For tax years 2025 through 2028, someone who is owed overtime under the federal Fair Labor Standards Act (FLSA) can deduct the premium part of that overtime: the "half" in time and a half, up to $12,500 a year ($25,000 on a joint return). The limit shrinks once modified adjusted gross income passes $150,000 ($300,000 joint). The straight time part of overtime pay, and overtime that only a state law or the employer requires, does not count.
The rule is in 26 U.S.C. § 225, added by section 70202 of Public Law 119-21 (the One, Big, Beautiful Bill Act; the IRS now also calls it the Working Families Tax Cuts law). The details below are checked against IRS guidance on October 12, 2026: the statute, the IRS questions and answers FS-2026-13 (August 2026), Notice 2025-69 for 2025, and the 2026 Form W-2 instructions.
The rules at a glance
| Point | Rule | Source |
|---|---|---|
| What can be deducted | Overtime pay required under section 7 of the FLSA that is in excess of the regular rate | § 225(c)(1) |
| Limit | $12,500 per return, $25,000 on a joint return | § 225(b)(1) |
| Income phase-out | Reduced by $100 for each $1,000 of MAGI over $150,000 ($300,000 joint), not below zero | § 225(b)(2) |
| Years | Tax years beginning after December 31, 2024; none after December 31, 2028 | sec. 70202(g), § 225(g) |
| Social Security number | Must be on the return; FAQ Q24: valid for employment and issued before the return's due date | § 225(d), FAQ Q24 |
| Married | Only on a joint return | § 225(e) |
| Itemizing | Available whether or not the taxpayer itemizes | sec. 70202(b), FAQ Q1 |
| Reported on | Form W-2 box 12, code TT, from tax year 2026 (rarely Form 1099-NEC box 1d or 1099-MISC box 14) | § 6051(a)(19), FAQ Q6 and Q10 |
| Claimed on | Schedule 1-A (Form 1040), Part III | FAQ Q19 |
The statute counts MAGI as adjusted gross income plus amounts excluded under sections 911, 931 and 933 (income earned abroad or in certain U.S. territories). In numbers: $10,000 of MAGI over the threshold lowers the allowable amount by $1,000.
What counts as qualified overtime compensation
The statute defines it as "overtime compensation paid to an individual required under section 7 of the Fair Labor Standards Act of 1938 that is in excess of the regular rate". Three parts of that sentence decide most cases.
Required under the FLSA. The FLSA generally requires 1.5 times the regular rate for hours over 40 in a workweek. The deduction follows that federal rule only. FAQ Q16 lists overtime that is not required by the FLSA: premiums paid by the employer's own choice, under a state law, or under a union contract, for example "for hours beyond 8 on a workday", for hours beyond 35 in a week, or on weekends and holidays. Those premiums are not qualified overtime unless the same hours are also FLSA overtime.
In excess of the regular rate. Only the premium counts, not the hour's straight pay. The 2026 W-2 instructions say it directly: "only the 'half' portion of 'time-and-a-half'" is reported with code TT.
Paid to an FLSA overtime-eligible employee. Someone exempt from FLSA overtime (FAQ Q4 lists, among others, executive, administrative and professional employees, outside sales and certain computer jobs) has no qualified overtime, even if a state law or a union contract pays them overtime. Salaried exempt employees are not covered by FLSA overtime, so their classification is the first thing to check.
For most employees, FAQ Q12 gives the formula for each workweek:
FLSA hours over 40 in the workweek x one-half x FLSA regular rate = qualified overtime compensation for that week
The workweek is a fixed 168 hour period that can start on any day, and each week stands alone; hours are never averaged across weeks (FAQ Q13). The regular rate is not always the posted hourly wage: it includes most pay for the week, such as nondiscretionary bonuses, divided by the hours worked (FAQ Q15). Some employees, such as hospital workers or police and firefighters under special FLSA work periods, follow other parts of the FLSA; for them the premium actually paid under those rules is used (FAQ Q17).
This guide explains the rule and does the hours and pay arithmetic. This is a calculation, not tax advice and not legal advice.
Worked example: a 46 hour week at $22 an hour
An hourly employee under the federal rule works Monday to Wednesday 7:00 AM to 5:30 PM with a 30 minute unpaid break (10 hours a day) and Thursday and Friday 8:00 AM to 4:30 PM with a 30 minute break (8 hours a day). The workweek starts on Sunday, the rate is $22 an hour and there are no bonuses, so the regular rate is $22.
With the "U.S. federal (FLSA): over 40 hours a week" preset, the calculator shows:
| Hours | Pay | |
|---|---|---|
| Regular | 40:00 | $880.00 |
| Overtime at 1.5x ($33) | 6:00 | $198.00 |
| Gross pay | 46:00 | $1,078.00 |
The $198 of overtime pay has two parts:
| Part of the overtime pay | Amount | Qualified? |
|---|---|---|
| Straight time: 6 x $22 | $132.00 | no |
| Premium: 6 x $22 x 0.5 = 6 x $11 | $66.00 | yes |
So $66 of this week is qualified overtime compensation. The premium is always one third of overtime paid at exactly 1.5 times the regular rate: $198 / 3 = $66. Notice 2025-69 used the same one-third shortcut as one of its methods for 2025.
A year, as an illustration only. Someone at a $22 regular rate who works 5 overtime hours in each of 50 workweeks earns 5 x $11 = $55 of premium a week, or 50 x $55 = $2,750 of qualified overtime compensation for the year. This shows how the weekly amounts add up to the kind of total that appears in box 12, code TT. It is not a calculation of anyone's deduction: the deductible amount depends on the limit, MAGI, filing status and the other conditions above, and is worked out on Schedule 1-A.
State daily overtime and double time
This is where pay stubs and the deduction part ways. FAQ Q16 is clear that when an employer pays more than the FLSA requires, "only the amount minimally necessary to satisfy 29 USC § 207 is qualified overtime compensation". Two California weeks at $22 an hour show what that means (both computed with the calculator's California and federal presets; the California overtime law guide explains the state rules).
Four 10 hour days (40 hours). California pays 2 hours of daily overtime each day: 8 hours at $33, so $264 of overtime pay and $968 gross. Under the federal rule the week is exactly 40 hours with no overtime. The California premium paid is 8 x $11 = $88, and none of it is qualified overtime, because there are no FLSA hours over 40.
One 14 hour day plus four 8 hour days (46 hours). California pays the Monday as 8 regular hours, 4 hours at 1.5x and 2 hours at 2x: 4:00 of overtime ($132) and 2:00 of double time ($88), $1,100 gross. Under the federal rule the same week has 6 hours over 40.
| Same 46 hour week at $22 | California pay | Premium above straight time | Qualified (FLSA formula) |
|---|---|---|---|
| 4:00 at 1.5x | $132.00 | 4 x $11 = $44.00 | |
| 2:00 at 2x | $88.00 | 2 x $22 = $44.00 | |
| Week | $220.00 | $88.00 | 6 x $22 x 0.5 = $66.00 |
The worker received $88 of premium, but only $66 is the FLSA premium. The FAQ's own example works the same way: 10 overtime hours paid at double time on a $20 rate is $200 of premium, of which $100 is qualified.
California is one of four states with daily overtime in the U.S. Department of Labor's state table, with Alaska, Nevada and Colorado; other states can have their own rules. The overtime laws by state guide lists them. In every state, the qualified amount follows the federal 40 hour count, not the state one.
How it shows on the W-2: 2025 versus 2026 onward
Tax year 2025. The 2025 Forms W-2 and 1099 were not changed, so employers did not have to show qualified overtime separately, and the IRS gave payors penalty relief for 2025 (Notice 2025-62). Notice 2025-69 let employees still claim the deduction for 2025 using an amount from box 14 of the W-2 or a separate employer statement, or a reasonable method based on pay statements. One of those methods, for someone without any such statement, uses the regular rate and the hours over 40 in each workweek, or a reasonable approximation of them, and asking the employer for the figures is listed as a reasonable method.
Tax year 2026 onward. Employers must report the total in box 12, code TT of Form W-2 (FAQ Q10). That figure is all of the qualified overtime paid and can be larger than what is deductible: the IRS example is $30,000 in code TT against the $12,500 limit. FAQ Q20 states that no relief is available after 2025: only the amount in code TT can be used. If the employer left it out or understated it, the route is a corrected Form W-2c from the employer (FAQ Q22); a substitute Form 4852 does not count (FAQ Q23). If the box shows too much, only the amount actually paid counts (FAQ Q21).
What the deduction does not change
- Paychecks. Overtime, including the qualified premium, is still subject to federal income tax withholding. An employer may lower withholding for the deduction only after the employee files an updated Form W-4; the 2026 Form W-4 has a line for it in step 4(b) (FAQ Q8 and Q9).
- Social Security and Medicare. The deduction does not exclude overtime from wages for employment taxes (FAQ Q1); the W-2 instructions repeat that overtime stays subject to social security and Medicare tax.
- The straight time part. The $22 an hour inside each overtime hour in the example stays ordinary taxable pay.
- State income tax. This guide covers the federal deduction only. State treatment was not verified.
Public sector employees who take comp time instead of cash have their own timing rule: the qualified amount counts when the comp time is paid, as a day off taken or a cash out, not when it is earned (FAQ Q18). The comp time guide explains how comp time accrues.
Using the calculator for the hours behind the number
The overtime calculator counts hours and pay per workweek. It shows how many hours are over 40 in each week and what the week pays; it does not compute the deduction, MAGI, the phase-out or any tax.
- Open the overtime calculator and choose "U.S. federal (FLSA): over 40 hours a week" under "Overtime rules". Use it even in a state with daily overtime, because the deduction follows the federal count.
- Set "Workweek starts on" to the employer's workweek.
- Enter start, end and unpaid break for each day, and the hourly rate.
- Read the "Overtime" line (the hours over 40) and "Overtime pay". Overtime pay is the full 1.5x amount; the premium is one third of it when the multiplier is 1.5, or overtime hours x rate x 0.5.
For a two week pay period, the biweekly timesheet calculator keeps the two workweeks apart, which is how both the FLSA and the deduction count them. To see the 1.5x rate on its own, use the time and a half calculator.
Limits of the numbers: the calculator multiplies the rate you enter. It does not build an FLSA regular rate that includes bonuses or shift differentials, so with those the premium per hour is higher than rate x 0.5. It does not know whether a job is FLSA exempt. And from 2026 on, the amount that matters for the return is the one in code TT, not a recalculation.
Sources checked on October 12, 2026: Public Law 119-21 sec. 70202 (26 U.S.C. § 225), IRS FS-2026-13 (August 2026), IRS Notice 2025-69, 2026 General Instructions for Forms W-2 and W-3, IRS fact sheet FS-2025-03 and the IRS page on the No Tax on Overtime deduction.
FAQ
Is overtime tax free now?
No. Overtime is still taxable pay and still withheld on. For tax years 2025 to 2028, the FLSA premium part of overtime, the "half" in time and a half, can be deducted on the federal return, up to $12,500 ($25,000 joint), with a phase-out above $150,000 of MAGI ($300,000 joint).
Does the whole overtime check count?
No. Only the amount above the regular rate that the FLSA requires. At $22 an hour, an overtime hour pays $33, and $11 of it is qualified overtime compensation.
Does California daily overtime or double time count for no tax on overtime?
Only up to the FLSA premium. Daily overtime in a week of 40 hours or less has no qualified part, and in a week over 40 hours only hours over 40 x one-half x the regular rate counts, even if some of those hours were paid at double time.
Where is qualified overtime on the W-2?
From tax year 2026, in box 12 with code TT. For 2025, employers did not have to show it separately, and Notice 2025-69 allowed reasonable methods based on pay statements.
Does the deduction apply if I do not itemize?
Yes. The statute adds it to the deductions allowed to non-itemizers, and the IRS confirms it is available with the standard deduction. It is claimed on Schedule 1-A.
Can married people filing separately claim it?
No. A married taxpayer must file a joint return, and the return must include a valid Social Security number; if both spouses have qualified overtime, both numbers.
When does no tax on overtime end?
The statute allows no deduction for tax years beginning after December 31, 2028. Tax years 2025, 2026, 2027 and 2028 are covered.
Do salaried employees get the deduction?
Only if they are FLSA overtime-eligible. Employees exempt from FLSA overtime, such as many executive, administrative and professional employees, have no qualified overtime, even if their employer or a state law pays them overtime.