Overtime Tax 2026: How No Tax on Overtime Works

Quick answer: overtime is still taxed at your ordinary rate, but for tax years 2025 through 2028 the “no tax on overtime” deduction lets you subtract up to $12,500 ($25,000 on a joint return) of qualified overtime compensation from your federal taxable income (IRS FS-2026-13). It covers only the premium part of FLSA overtime, it does not reduce Social Security or Medicare, and it phases out above $150,000 of modified AGI.

Check your projected take-home with our Paycheck Calculator or price an overtime week with the Overtime Pay Calculator.

What the No Tax on Overtime Deduction Covers

The deduction comes from P.L. 119-21, the 2025 budget law, and is codified at 26 U.S.C. § 225. In the IRS’s words, it is “available whether the individual itemizes or takes the standard deduction,” so you claim it on top of the $16,100 standard deduction for a single filer in 2026.

Rule	2026 detail
Years	Tax years 2025 to 2028; no deduction for years beginning after December 31, 2028
Cap	$12,500 per return, $25,000 for a joint return
What counts	Only the pay above your regular rate that section 7 of the FLSA requires
Phase-out	Cap reduced by $100 for each $1,000 of modified AGI above $150,000 ($300,000 joint)
Payroll taxes	Social Security and Medicare still apply to all overtime pay
Reporting	From 2026, employers report it on Form W-2, box 12, code TT

The IRS example in FS-2026-13 shows the “premium only” rule: a worker earning $20 an hour who works 10 overtime hours gets $300 under the FLSA ($200 of straight time plus a $100 premium). Only the $100 is qualified overtime compensation. If the employer pays double time ($400), the extra $100 above what the FLSA requires still does not count.

Who Qualifies, and Who Does Not

You qualify if you are an employee covered by the FLSA overtime rules and your employer pays you time-and-a-half for hours over 40 in a workweek. These do not qualify:

• Exempt employees: salaried workers who meet the FLSA executive, administrative or professional tests do not receive FLSA overtime, so there is nothing to deduct. See overtime pay rules for the exemption tests.
• Overtime required only by other rules: daily overtime under California law, premiums set by a union contract, or a company’s own double-time policy. The IRS treats only “the amount minimally necessary to satisfy 29 USC § 207” as qualified.
• Taxpayers without a valid work SSN: the return claiming the deduction must include a Social Security number valid for employment.

How Much It Saves: A Worked Example

A single filer earns $25 an hour, works 40 regular hours plus 10 overtime hours a week for 50 weeks, and has no other income.

Line	Amount
Regular pay (2,080 hours × $25)	$52,000
Overtime pay (500 hours × $37.50)	$18,750
Gross wages	$70,750
Qualified overtime (500 hours × $12.50 premium)	$6,250

The $6,250 is under the $12,500 cap and income is far below $150,000, so all of it is deductible.

Federal income tax, 2026 brackets	Without deduction	With deduction
Gross wages	$70,750	$70,750
Standard deduction	−$16,100	−$16,100
Overtime deduction	$0	−$6,250
Taxable income	$54,650	$48,400
Federal income tax	$6,735	$5,560

The deduction saves $1,175 of federal income tax: $4,250 of it came off the 22% bracket and $2,000 off the 12% bracket. Social Security and Medicare stay at $5,412 (7.65% of $70,750) either way.

There Is No Special Overtime Tax Rate

The deduction lowers taxable income; it does not create a separate rate. Overtime that remains taxable is added to your other wages and taxed with the 2026 brackets from IRS Rev. Proc. 2025-32:

Taxable Income (Single)	Federal Rate
$0 to $12,400	10%
$12,401 to $50,400	12%
$50,401 to $105,700	22%
$105,701 to $201,775	24%
$201,776 to $256,225	32%
$256,226 to $640,600	35%
Over $640,600	37%

If you’re in the 22% bracket, your taxable overtime is taxed at 22%, the same as the last dollars of your regular pay.

Why Your Overtime Check Still Looks Heavily Taxed

Two things keep the deduction out of your paycheck unless you act.

Withholding does not change on its own. The IRS says overtime “is subject to federal income tax withholding” and an employer “may not reduce withholding” for the deduction unless you file a new Form W-4 that accounts for it. The 2026 W-4 has a line for this in step 4(b), and the IRS Tax Withholding Estimator includes the deduction too. Without a new W-4, you get the savings when you file.

Annualized withholding. Payroll software projects each paycheck over the whole year. A monthly check of $3,000 is withheld as if you earned $36,000 a year; a $6,000 month with overtime is withheld as if you earned $72,000. That one month is over-withheld, and the excess comes back as a refund once your actual annual income is known.

Some employers pay overtime separately and withhold the 22% flat rate for supplemental wages, which stays at 22% in 2026 (37% above $1 million) per IRS Publication 15 (2026).

When Overtime Pushes You Into a Higher Bracket

Overtime can move part of your income into the next bracket. With $100,000 of taxable income and $10,000 of taxable overtime, the $4,300 above $105,700 is taxed at 24% instead of 22%, about $86 more. Because the overtime deduction comes off the top of taxable income, it removes those highest-taxed dollars first.

Overtime and FICA

The deduction applies to income tax only. Pub. 15 states that overtime “is still generally subject to both the employer share and employee share of social security tax and Medicare tax”:

• Social Security: 6.2% up to the $184,500 wage base in 2026
• Medicare: 1.45% on all wages, plus 0.9% Additional Medicare Tax on wages above $200,000 for a single filer

What About State Income Tax?

The deduction is federal. Whether your state allows it depends on your state’s tax code: a state that starts from federal taxable income may follow it, while others tax all overtime. Check your state revenue department before counting on a state saving.

Key Takeaways

1. Overtime is taxed at your ordinary marginal rate; there is no overtime tax rate
2. For 2025 to 2028, you can deduct up to $12,500 of the FLSA overtime premium, whether or not you itemize
3. The deduction phases out above $150,000 of modified AGI and never covers Social Security or Medicare
4. To see it in each paycheck, file a new Form W-4; otherwise it arrives at tax time