On this page
- What "no tax on overtime" means
- Is overtime taxed?
- What counts as qualified overtime
- Qualified overtime examples
- How the income phase-out works
- What employers report on Form W-2
- How to keep FLSA overtime separate in your time records
- Full-year example
- How TimeClick helps with overtime records
- No tax on overtime FAQ
Short answer: Overtime is still taxed when it's paid, and employers withhold federal income tax on it as usual. For tax years 2025 through 2028, employees can deduct up to $12,500 of qualified overtime ($25,000 on a joint return) when they file. Qualified overtime is only the premium federal law requires, usually the "half" in time and a half.
What "no tax on overtime" means
A 2025 federal tax law (Public Law 119-21, signed July 4, 2025), often called the One Big Beautiful Bill Act, created a deduction for qualified overtime compensation. People call it "no tax on overtime," but the overtime itself is still taxed when it's paid. The employee gets the break later, as a deduction on their federal income tax return.
Here's how the deduction works:
- Years: tax years 2025 through 2028.
- Limit: up to $12,500 of qualified overtime a year, or $25,000 on a joint return.
- Income phase-out: the deduction goes down by $100 for each full $1,000 of modified adjusted gross income (MAGI) over $150,000, or $300,000 on a joint return.
- Who can claim it: both itemizers and people who take the standard deduction. Married employees must file a joint return, and a Social Security number valid for employment must be on the return.
- Where it's claimed: on Schedule 1-A of Form 1040.
- What it covers: federal income tax only. State income tax rules are set by each state.
Sources: IRS, tax deductions for working Americans and seniors, IRS FS-2026-13 and Schedule 1-A (Form 1040), checked Nov 10, 2026.
Is overtime taxed?
Yes. Overtime pay, including qualified overtime, is wages. Employers withhold federal income tax on it, and employment taxes such as Social Security and federal unemployment tax still apply. The deduction lowers the employee's taxable income when they file their return. It doesn't change what you take out of each paycheck.
You can't lower an employee's withholding on your own because of the deduction. An employee who wants less withheld can give you a new Form W-4 that counts the expected deduction in step 4(b).
Source: IRS FS-2026-13, questions 1, 8 and 9, checked Nov 10, 2026.
What counts as qualified overtime
Qualified overtime is the overtime pay the Fair Labor Standards Act (FLSA) requires above the regular rate. For most employees, that's the half-time premium for hours over 40 in a workweek. The IRS works it out one workweek at a time:
Qualified overtime for a week = FLSA overtime hours x 0.5 x the FLSA regular rate
What doesn't count:
- The straight-time part of overtime. In time and a half, only the "half" counts.
- Pay above the FLSA minimum. If you pay double time, only the amount the FLSA requires counts.
- Overtime required only by state law, such as California daily overtime in a week with 40 or fewer hours.
- Overtime required only by a union contract or company policy.
- Extra pay for exempt employees. Employees who are exempt from FLSA overtime have no qualified overtime, even if you pay them for long weeks. See exempt vs non-exempt employees.
The regular rate includes most pay for the work, such as commissions and bonuses promised in advance. It leaves out discretionary bonuses and pay for time off. If you leave a promised bonus out of the regular rate, the qualified amount comes out too low. More on this in how to calculate overtime pay rates.
Sources: IRS FS-2026-13, questions 4, 10, 12 and 16; IRS Notice 2025-69; DOL Fact Sheet #56A, checked Nov 10, 2026.
Qualified overtime examples
Time and a half. An employee earns $20 an hour and works 46 hours in one workweek.
- Overtime pay: 6 hours x $30 = $180
- Qualified overtime: 6 hours x $20 x 0.5 = $60
Double time. This is the IRS's own example. An employee earns $20 an hour and works 10 overtime hours, and the employer pays double time.
- Overtime pay: 10 hours x $40 = $400
- What the FLSA requires: 10 hours x $30 = $300
- Qualified overtime: 10 hours x $20 x 0.5 = $100
California daily overtime. An employee earns $20 an hour and works four 10-hour days, 40 hours in the week, with no alternative workweek schedule.
- California daily overtime: 8 hours (2 a day over 8) x $30 = $240
- Hours over 40 in the workweek: 0
- Qualified overtime: $0, because the FLSA requires no overtime in that week
More on the state rule: California overtime laws.
How the income phase-out works
The deduction starts to shrink when MAGI is over $150,000 ($300,000 on a joint return). Schedule 1-A takes the amount over that line, divides it by $1,000, drops any fraction, and multiplies by $100. That amount comes off the deduction.
Example: a single filer has $10,000 of qualified overtime and MAGI of $162,500.
- Amount over $150,000: $12,500
- $12,500 / $1,000 = 12.5, which becomes 12
- Reduction: 12 x $100 = $1,200
- Deduction: $10,000 minus $1,200 = $8,800
Source: Schedule 1-A (Form 1040), lines 15 to 21, checked Nov 10, 2026.
What employers report on Form W-2
Starting with tax year 2026, you must report each employee's total qualified overtime on Form W-2 in box 12 with code TT. The 2026 Forms W-2 are the ones you give employees in early 2027.
- Report the full amount you paid, even if it's more than the employee can deduct. If you paid $30,000 of qualified overtime, report $30,000.
- From 2026 on, employees generally can't deduct more than the box 12, code TT amount.
- If you report too little, the employee needs a corrected Form W-2c from you to claim the rest. If you report too much, they can still deduct only what they were actually paid.
- For tax year 2025, Notice 2025-69 gave employers relief from separate reporting, and employees could use that notice's methods to figure the amount. No relief applies to 2026 or later.
- Forms 1099-MISC (box 14) and 1099-NEC (box 1d) are used only in rare cases, where a worker is an FLSA employee but an independent contractor for tax purposes.
Source: IRS FS-2026-13, questions 6, 7, 10, 20, 21 and 22, checked Nov 10, 2026.
How to keep FLSA overtime separate in your time records
You can only report the right number if your records show, for every workweek, the hours over 40 and the regular rate. A few habits make that easier:
- Fix your workweek. It's a set 168-hour period, such as Sunday 12:00 AM to Saturday 11:59 PM. Don't average hours across two weeks, even with biweekly pay.
- Record hours each day. Federal recordkeeping rules already require daily and weekly hours for non-exempt employees.
- Split overtime by source. Keep FLSA weekly overtime apart from state daily overtime, union overtime and any extra premium you pay by policy.
- Work out the regular rate each week. Add promised bonuses, commissions and shift pay before you figure the half-time premium.
- Keep a running total per employee. At year end, the total of the weekly premiums is the box 12, code TT amount.
Full-year example
An employee earns $24 an hour. In 2026 she works 46 hours in 20 weeks, 42 hours in 10 weeks and 40 hours or less in every other week. She has no bonuses or state-only overtime.
- Weeks at 46 hours: 20 x 6 hours x $12 = $1,440
- Weeks at 42 hours: 10 x 2 hours x $12 = $240
- Qualified overtime for box 12, code TT: $1,680
- Her total overtime pay for the year: 140 hours x $36 = $5,040
If her MAGI is under $150,000, she can deduct the full $1,680 on her 2026 return.
How TimeClick helps with overtime records
TimeClick totals hours for each employee and flags overtime on every Hours Report before you export payroll. Reports run for any date range you set, so you can check each workweek. Payroll files export to QuickBooks Desktop, QuickBooks Online, Gusto, ADP and Passport, where your payroll provider figures the W-2 amounts. See timesheet and payroll reports or start the 14-day free trial.
Related: the time card calculator totals a week's hours, and the overtime laws guide covers the federal and state pay rules.
This page is general information, not tax advice. Check the IRS links above or ask a tax professional about your situation.
No tax on overtime FAQ
Is overtime taxed?
Yes. Overtime is taxed when it's paid, with federal income tax withheld as usual. For 2025 through 2028, employees can deduct up to $12,500 of qualified overtime ($25,000 on a joint return) on their federal income tax return.
What is qualified overtime compensation?
It's the overtime pay the FLSA requires above the regular rate, usually the "half" in time and a half for hours over 40 in a workweek. Overtime required only by state law, a union contract or company policy doesn't count.
How much overtime can I deduct?
Up to $12,500 a year, or $25,000 on a joint return. The limit drops by $100 for each full $1,000 of modified adjusted gross income over $150,000, or $300,000 on a joint return.
Which years does the overtime deduction cover?
Tax years 2025 through 2028.
Do employers still withhold taxes on overtime?
Yes. Federal income tax withholding and employment taxes still apply. An employee who wants less withheld can give the employer a new Form W-4 that includes the expected deduction in step 4(b).
Where do employers report qualified overtime?
Starting with 2026, on Form W-2 in box 12 with code TT. Report the full amount paid, even if it's more than the employee can deduct.
Does California daily overtime count?
Only the part the FLSA also requires. Overtime for hours over 8 in a day, in a week with 40 or fewer hours, doesn't count.
Does double time count as qualified overtime?
Only the FLSA-required half-time premium counts. In the IRS example, an employee earning $20 an hour is paid $400 for 10 hours of double time, and $100 of that is qualified overtime.
Do salaried exempt employees get the overtime deduction?
No. Employees who are exempt from FLSA overtime have no qualified overtime, even if the employer pays them extra for long weeks.
Do I need to itemize to claim the overtime deduction?
No. It's available whether you itemize or take the standard deduction. It's claimed on Schedule 1-A of Form 1040.
