No tax on overtime is a federal income tax deduction, not a tax-free paycheck. You can deduct the premium part of overtime the Fair Labor Standards Act requires, usually the extra half of time-and-a-half, up to 12,500 dollars a year (25,000 dollars on a joint return), and it shrinks once your modified adjusted gross income passes 150,000 dollars.
The name makes it sound as though overtime is now tax-free. It isn't. Your full overtime pay still shows on your W-2, and the deduction only covers part of it. Plenty of people who work extra hours won't qualify at all, because the rule is tied to one federal law. Here's how the IRS describes it.
What counts as qualified overtime
The IRS calls it qualified overtime compensation: overtime required under the Fair Labor Standards Act (FLSA) that's above your regular rate. If you're paid time-and-a-half, only the "half" counts. The "time" part is your normal pay for the hour, and that's taxed as usual.
| Your situation | What you can deduct |
|---|---|
| Paid time-and-a-half for hours over 40, FLSA overtime-eligible | The half portion above your regular rate |
| Employer pays double time where the FLSA only requires time-and-a-half | Only the FLSA-required half, not the extra |
| Overtime paid under a union contract but you're FLSA-exempt | Nothing |
| Salaried and exempt from FLSA overtime | Nothing |
The catch most people miss: it's the FLSA or nothing
The IRS is explicit that if you're not eligible for overtime under the FLSA, you don't have qualified overtime compensation, even if a collective bargaining agreement or another law gives you overtime pay. So the question isn't "do I get paid overtime?" It's "am I covered by, and not exempt from, the FLSA's overtime rule?" FLSA-eligible employees generally have to be paid at least one and one-half times their regular rate for hours over 40 in a workweek.
Whether you're exempt depends on your job, duties and earnings. The IRS points to the Department of Labor's FLSA fact sheets to check. Federal employees can look at their Standard Form 50, block 35: E means exempt, N means overtime-eligible.
The limits
| Limit | Single | Married filing jointly |
|---|---|---|
| Maximum deduction | 12,500 dollars | 25,000 dollars |
| Starts to phase out above MAGI of | 150,000 dollars | 300,000 dollars |
Two more rules: you need a Social Security number that's valid for employment, on the return, and if you're married you must file jointly to claim it. You can take the deduction whether you itemize or use the standard deduction.
A worked example
Say you earn 20 dollars an hour and you're FLSA overtime-eligible. An overtime hour pays 30 dollars. Of that, 20 dollars is your regular rate and 10 dollars is the premium. Work 300 overtime hours in the year and your premium is 3,000 dollars. That 3,000 dollars is what you could deduct, not the 9,000 dollars of overtime pay. These figures are mine, worked from the IRS rule, to show the split.
2025 vs 2026: where to find the number
For 2025, employers weren't required to show qualified overtime separately on W-2s or 1099s, so many workers had to work it out themselves using the Schedule 1-A instructions. Some employers used box 14 of the W-2 or a separate statement. From tax year 2026, employers and other payers are required to report qualified overtime separately, so your 2026 paperwork should show the figure. Keep your pay stubs anyway, in case it's missing or wrong.
How to claim it
- Check you're FLSA overtime-eligible, not exempt.
- Find your qualified overtime figure on your W-2 or employer statement, or work out the premium portion from your pay stubs.
- Claim the deduction on Schedule 1-A with your Form 1040.
- Include your Social Security number, and file jointly if you're married.
- Check whether your modified adjusted gross income triggers the phase-out.
Common situations, answered
- You work a second job with overtime. Qualified overtime from each FLSA-covered job counts, but the 12,500 dollar cap is per return, not per job.
- Your employer pays a flat overtime bonus. Only overtime the FLSA requires, above your regular rate, qualifies. A bonus that isn't FLSA overtime doesn't.
- You're a federal employee. Check block 35 of your Standard Form 50. Special pay rules may apply, so your HR or payroll office is the place to confirm the figure.
- You earn close to the phase-out. The deduction shrinks once modified adjusted gross income passes 150,000 dollars (300,000 dollars jointly), so higher earners get less of it.
Overtime vs tips: two separate deductions
The same law created a separate deduction for qualified tips, with its own rules. If you earn both tips and overtime, they're separate deductions with separate rules. Don't assume what's true for one applies to the other. If you're a tipped worker, look at the tip rules on their own.
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What the deduction doesn't do
It doesn't change your paycheck: your employer still withholds as normal unless you update your withholding. And it's an income tax deduction, so it doesn't make overtime free of Social Security and Medicare tax. If you're self-employed or paid as a contractor, there's no FLSA overtime, so this deduction doesn't apply to you.
My verdict
If you're an hourly worker who regularly does overtime, this is worth claiming, but expect a deduction on the premium only. Before you count on it, confirm your FLSA status. If you're weighing employee work against contracting, my guides to LLC vs sole proprietorship and when you need a tax preparer help with the next questions.
Frequently asked questions
Is overtime tax-free now?
No. You can deduct the FLSA-required premium portion of overtime, up to 12,500 dollars (25,000 dollars jointly), but the rest is taxed as normal.
Who qualifies for no tax on overtime?
Employees who are covered by and not exempt from the Fair Labor Standards Act's overtime rule, with a valid Social Security number.
Does union contract overtime count?
Not if you're FLSA-exempt. The IRS says overtime paid only under a collective bargaining agreement doesn't qualify.
Do I need to itemize to claim it?
No. The IRS says it's available whether you itemize or take the standard deduction.
Can married couples filing separately claim it?
No. Married taxpayers must file a joint return to claim the deduction.
