What the deduction actually covers
The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, added section 225 to the tax code: a federal income tax deduction for qualified overtime compensation, for tax years 2025 through 2028. Qualified overtime is only the premium portion of overtime that the Fair Labor Standards Act requires, the "half" in time-and-a-half. If your base rate is $28, you earn $42 for each overtime hour, but only $14 of each hour is deductible.
Worked example
Base rate $28/hour, 6 FLSA overtime hours a week for 50 weeks (300 hours), single filer, MAGI $62,000, 22% bracket.
- Total overtime pay: $42 x 300 = $12,600.
- Qualified premium: $14 x 300 = $4,200.
- Deduction: min($4,200, $12,500) = $4,200 (no phase-out at this income).
- Federal income tax savings: $4,200 x 22% = $924.
The cap and the MAGI phase-out
The deduction is capped at $12,500 per return, or $25,000 for married couples filing jointly. It shrinks by $100 for every $1,000 of modified adjusted gross income above $150,000 (single) or $300,000 (joint). These amounts are fixed in the statute and are not indexed for inflation.
Overtime that does not qualify
- State-law overtime, such as California daily overtime after 8 hours, when you did not also work over 40 hours that week.
- Union-contract or employer-policy overtime beyond what the FLSA requires (for example, overtime paid for weekend work regardless of hours).
- The extra pay in double time: only the FLSA half-rate premium counts.
- Overtime earned by employees who are exempt from FLSA overtime (many salaried managers and professionals).
How it is reported
For 2025, IRS Notice 2025-62 gave employers penalty relief, so many 2025 W-2s did not separate qualified overtime; you can use pay stubs and payroll records to work out the premium. Starting with 2026 pay, updated W-2 and 1099 forms report qualified overtime separately, which makes the number easier to find. You need a valid Social Security number, and married couples must file jointly to claim it. It is available whether you itemize or take the standard deduction.
Payroll and state taxes still apply
This is a federal income tax deduction only. Social Security and Medicare (7.65% for employees) still apply to every overtime dollar, and state income tax depends on whether your state follows the federal rule.
More 2026 tax calculators
The same law created other temporary deductions with their own tools: the No Tax on Tips Calculator 2026 (up to $25,000 of tips), the Senior Bonus Deduction Calculator 2026 ($6,000 per person aged 65 or older), and the Gambling Losses Tax Calculator 2026. To check your gross overtime pay first, use the Overtime Pay Calculator.
This calculator is an estimate, not tax advice. Whether your overtime is FLSA-required depends on your job classification and pay records; confirm with a tax professional.