No Tax on Overtime 2026: How Much Can You Deduct?

Updated for tax year 2026 — reflects IRS Fact Sheet 2026-13 (August 6, 2026).

If you’ve been picking up extra shifts and heard that overtime is suddenly “tax-free” in 2026, you’ve heard half the story — literally. The new federal deduction only applies to half of your overtime premium, it has strict income limits, and most states haven’t adopted it at all. Here’s exactly how much you can deduct, who actually qualifies, and how to work out your own number before you file.

What Is the “No Tax on Overtime 2026” Deduction, Really?

“No Tax on Overtime” is the popular nickname for a new federal income tax deduction created under Internal Revenue Code Section 225, added by the One Big Beautiful Bill Act (OBBBA), which President Trump signed into law on July 4, 2025. The IRS and Treasury have since issued two rounds of official guidance — Fact Sheet 2026-01 in January 2026, and an updated Fact Sheet 2026-13 in August 2026 — clarifying exactly how the deduction works.

Despite the catchy name, this is not a payroll tax exemption. Your paycheck withholding doesn’t change because of it. Instead, it’s a deduction you claim when you file your federal tax return, which lowers your taxable income and, in turn, your tax bill.

It’s also narrower than most people assume. The deduction doesn’t cover your entire overtime paycheck — only the extra “half” premium required under the Fair Labor Standards Act (FLSA) when you’re paid time-and-a-half. We’ll break that down in detail below.

How Much Can You Actually Deduct in 2026?

For tax years 2025 through 2028, eligible taxpayers can deduct:

MAGI = modified adjusted gross income (generally your AGI, plus certain foreign-income exclusions under IRC §911, §931, or §933). Married taxpayers must file a joint return to claim the deduction at all — filing separately disqualifies you entirely.

Importantly, this deduction is available whether you take the standard deduction or itemize — you don’t have to give up your standard deduction to claim it.

The Phase-Out Formula Explained

Once your MAGI crosses the threshold, the deduction shrinks by $100 for every $1,000 you earn above it. It’s a straight-line reduction, not a cliff — so earning $1 over the limit doesn’t wipe out the whole deduction, it just trims it slightly.

Worked example: Say you’re single with a MAGI of $180,000 and you earned $4,000 in qualified overtime premium this year. You’re $30,000 over the $150,000 threshold, so your deduction is reduced by $3,000 ($100 × 30). Since your actual premium ($4,000) is below even the reduced cap, you can deduct the full $4,000 — the phase-out only matters once your overtime premium plus your income both push you toward the limit.

Who Qualifies for the Overtime Tax Deduction?

Eligibility hinges entirely on one thing: whether your overtime is required by Section 7 of the FLSA. That means you must be a non-exempt employee under federal wage-and-hour law.

One important nuance: if your state requires overtime that federal law doesn’t — California’s daily overtime after 8 hours is the classic example — only the portion that the FLSA itself would have required counts as “qualified” for this federal deduction. The extra state-mandated overtime is still taxable income; it just doesn’t qualify for the Section 225 deduction.

State and local government employees add another wrinkle. Many public-sector workers — firefighters, police officers, and other agencies covered by 29 U.S.C. §207(o) — are allowed to bank overtime as paid “comp time” instead of receiving cash. For these workers, the IRS treats the qualified overtime as “paid” (and therefore deductible) only in the year they actually use the comp time off or cash it out at separation from employment — not in the year they originally earned it. If you’re a government employee sitting on a large comp-time balance, your deduction timing may not match when you actually worked the extra hours.

What Actually Counts as “Qualified Overtime Compensation”?

This is the detail that trips up almost everyone. When your employer pays you “time-and-a-half,” that 1.5x rate is made up of two parts:

• 1.0x — your normal regular-rate pay for that hour (fully taxable, same as always)
• 0.5x — the overtime premium (this is the only part that’s deductible)

The IRS uses this example in its official FAQs: if you normally earn $18/hour and are paid $27/hour for overtime (1.5x), only the extra $9/hour premium is “qualified overtime compensation.” The other $18 of that $27 is regular wages, taxed exactly as it always has been.

Here’s a fuller example straight from IRS guidance: a cook earns $50,000 in a year — $40,000 in regular wages plus $10,000 in overtime pay at time-and-a-half. Because only the “half” portion of that overtime is qualified, the deductible amount works out to roughly $3,333 (one-third of the $10,000 overtime total). The cook ends up paying federal income tax on about $46,667 instead of the full $50,000.

If your employer pays overtime above the legally required 1.5x — say, double time as a company policy or union benefit — only the FLSA-required portion counts toward the deduction. Extra amounts beyond that aren’t qualified overtime compensation for this purpose.

How to Calculate Your 2026 Overtime Deduction

You can work out a rough estimate in four steps:

1. Add up your total overtime pay for the year — the full amount paid at your overtime rate, not just the premium.
2. Divide by 3 if you’re paid standard time-and-a-half (1.5x). That gives you the premium (“half”) portion — since the premium is always one-third of the total time-and-a-half payment.
3. Compare that number to the cap — $12,500 if single/HOH, $25,000 if married filing jointly.
4. Check the phase-out — if your MAGI is above $150,000 ($300,000 joint), reduce your allowable deduction by $100 per $1,000 over the threshold.

Want to skip the manual math? Our free Take-Home Pay & Overtime Calculator (2026) lets you enter your hourly rate and overtime hours and instantly see your gross pay, FICA, and take-home breakdown for both the US and UK — a fast way to sanity-check the overtime premium figure before you plug it into your tax software.

No Tax on Overtime vs. No Tax on Tips — Don’t Mix Them Up

The OBBBA actually created two separate “no tax on X” deductions in the same bill, and it’s easy to confuse them if you earn both tips and overtime:

A server who works overtime shifts and earns tips could potentially claim both deductions in the same year, subject to each one’s own cap and phase-out — they’re calculated independently, not combined into a single limit.

More Worked Examples at Different Pay Levels

Here’s how the deduction plays out for a few common hourly-rate and overtime-hour combinations, assuming standard time-and-a-half (1.5x) and income comfortably under the phase-out threshold:

Notice the last row: once the calculated premium exceeds the $12,500 single-filer cap, the deduction simply stops at the cap — you don’t lose the excess to a penalty, you just can’t deduct beyond the statutory limit.

The Big 2026 Change: Form W-2, Box 12, Code “TT”

For the 2025 tax year, the IRS gave employers penalty relief because payroll systems weren’t ready to separately track the premium portion of overtime. That grace period is over. Starting with tax year 2026 W-2s (the ones you’ll receive in early 2027), employers are required to report your qualified overtime compensation separately in Box 12 using code “TT.”

In practice, this means:

• You generally won’t have to calculate the premium amount yourself anymore — it’ll be printed on your W-2.
• If your employer under-reports the amount, you need a corrected Form W-2c before you can claim a larger deduction — you can’t self-certify a higher number using Form 4852.
• Your regular federal income tax withholding on overtime wages doesn’t change. Employers cannot reduce withholding just because you expect to qualify for the deduction later.

What This Deduction Does NOT Cover

This is where the “no tax on overtime” nickname causes the most confusion. The deduction only reduces federal income tax. It does not touch:

• Social Security tax (6.2%) — still withheld on 100% of your overtime pay
• Medicare tax (1.45%, plus 0.9% Additional Medicare Tax above certain income levels) — still withheld in full
• State and local income tax — see below, but most states still tax overtime normally
• The other two-thirds of your overtime pay — your regular-rate portion is taxed exactly as before

So if your paycheck still shows federal, FICA, and state withholding on every overtime hour, that’s normal — the benefit shows up later, as a deduction on your annual tax return, not as bigger paychecks throughout the year (unless you proactively adjust your W-4 withholding).

Does Your State Tax Overtime Too?

Yes, in most cases. State conformity to the federal overtime deduction has been much lower than for the related “no tax on tips” deduction. As of mid-2026, most states with an income tax have not adopted Section 225, meaning your overtime premium remains fully taxable at the state level even after you deduct it federally.

• No state income tax at all (so this is moot either way): Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
• States with rolling conformity to the federal tax code (like Montana) tend to pick up the deduction automatically.
• Most other income-tax states have not yet passed legislation to conform, so check your state department of revenue before assuming a state-level benefit.

Common Mistakes to Avoid

• Assuming all your overtime pay is deductible. Only the premium (“half”) portion qualifies — not the full time-and-a-half amount.
• Expecting a bigger paycheck right away. This is a deduction claimed at tax filing, not a payroll change.
• Forgetting the phase-out. High earners near $150K/$300K MAGI should recalculate near year-end, since bonuses or a raise can shrink the deduction.
• Assuming your state matches the federal rule. Check your state’s conformity status before counting on state-level savings.
• Filing separately as a married couple. This automatically disqualifies you from the deduction entirely.
• Claiming state-mandated daily overtime (e.g., California’s 8-hour rule) as if it were all federally qualified. Only the FLSA-required portion counts.

Frequently Asked Questions

Ready to see the numbers for your own paycheck? Try the free Overtime & Take-Home Pay Calculator (2026) — or head back to theseecom.com for more free calculators and guides.

Sources

• IRS, Questions and Answers About the New Deduction for Qualified Overtime Compensation (Fact Sheet 2026-13, updated August 6, 2026)
• IRS Newsroom, IRS updates FAQs on qualified overtime deduction (IR-2026-88, August 6, 2026)
• U.S. Department of Labor, Wage and Hour Division, Overtime Pay — Fact Sheet #23: Overtime Pay Requirements of the FLSA

This article is for general information only and is not personalized tax advice. Your specific eligibility and deduction amount depend on your full financial situation — consult a qualified tax professional or the official IRS guidance linked above before filing.

Want to check your own eligibility step by step? Use our Overtime Tax Deduction Calculator 2026 — Eligibility Checklist.