No Tax on Overtime: Qualified Overtime Deduction ($12,500 Max)

The Qualified Overtime Deduction, part of the One Big Beautiful Bill Act (OBBB), allows eligible workers to deduct overtime pay from their federal taxable income. The deduction is worth up to ~$12,500 for single filers and ~$25,000 for married couples filing jointly, and it uses the Fair Labor Standards Act (FLSA) definition of overtime: hours worked beyond 40 in a single workweek, paid at the required 1.5x rate.

Data Notice: Figures, rates, and statistics cited in this article are based on the most recent available data at time of writing and may reflect projections or prior-year figures. Always verify current numbers with official sources before making financial, medical, or educational decisions.

This guide covers who qualifies, who does not, income phaseout thresholds, how to claim the deduction on the new Schedule 1-A, and detailed examples with tax savings calculations. For an overview of all OBBB provisions, see One Big Beautiful Bill Tax Changes: Everything You Need to Know.

Key Facts at a Glance

Detail	Amount / Rule
Maximum deduction (single)	~$12,500
Maximum deduction (MFJ)	~$25,000
Overtime definition	FLSA: hours beyond 40/week at 1.5x rate
Income phaseout (single)	Begins at ~$150,000 MAGI
Income phaseout (MFJ)	Begins at ~$300,000 MAGI
How to claim	Schedule 1-A, Line 2
Effective tax years	2025 through 2028
Who does NOT qualify	Salaried FLSA-exempt employees

Understanding FLSA Overtime

The critical concept behind this deduction is the Fair Labor Standards Act definition of overtime. Under FLSA:

Overtime is any time worked beyond 40 hours in a single workweek
Overtime must be compensated at 1.5 times the employee’s regular rate of pay (commonly called “time and a half”)
The employer must be covered by FLSA (most private employers with $500,000+ in annual revenue, plus all government agencies)

This definition is narrower than many people assume. Working long days, working weekends, or simply working “a lot” does not automatically constitute FLSA overtime. The threshold is specifically 40 hours within a single workweek, and the employer must pay the legally required 1.5x premium.

What Counts as Overtime for This Deduction

Hours beyond 40 in a workweek, paid at time-and-a-half
Overtime hours reported on your W-2 or pay stubs as overtime
Overtime compensation identified separately from regular wages by your employer

What Does NOT Count

Straight-time pay for hours worked, even if you work 50+ hours per week as an exempt employee
Compensatory time (“comp time”) in lieu of overtime pay
Shift differentials (night shift premium, weekend premium) that are not overtime
Bonus pay or incentive pay
Self-employment income (self-employed individuals do not have “overtime” under FLSA)
Overtime paid by employers not covered by FLSA

Who Qualifies: FLSA Non-Exempt Workers

The deduction is available to workers who are non-exempt under the FLSA. These are typically hourly employees whose overtime pay is calculated at 1.5x their regular rate.

Qualifying Workers Include:

Manufacturing and production workers — factory line workers, machine operators, assemblers
Construction workers — carpenters, electricians, plumbers, laborers
Healthcare support staff — nurses (non-supervisory), medical technicians, home health aides, hospital orderlies
Retail workers — cashiers, stock clerks, sales floor associates
Public safety workers — police officers, firefighters, EMTs (subject to specific FLSA rules)
Transportation and warehouse workers — truck drivers (some exceptions), warehouse staff, dock workers
Food service workers — cooks, kitchen staff, dishwashers (who may also qualify for the tips deduction)
Maintenance and cleaning staff — janitors, groundskeepers, building maintenance

Who Does NOT Qualify: FLSA-Exempt Employees

Salaried employees who are exempt from FLSA overtime requirements do NOT qualify for this deduction, even if they routinely work more than 40 hours per week. Common exempt categories include:

Executive exemption — managers and supervisors who direct two or more employees
Administrative exemption — office workers performing non-manual work related to management or business operations
Professional exemption — employees in jobs requiring advanced knowledge (lawyers, doctors, engineers, accountants, teachers)
Computer employee exemption — certain IT professionals earning above the FLSA threshold
Highly compensated employee exemption — employees earning above ~$107,432 annually who perform at least one exempt duty
Outside sales exemption — salespeople who primarily work outside the employer’s place of business

If you are a salaried employee and your employer does not pay you overtime at 1.5x for hours beyond 40, you are likely FLSA-exempt and do not qualify for this deduction.

Income Phaseout

Like the tips deduction, the overtime deduction phases out at higher income levels.

Filing Status	Phaseout Begins	Phaseout Complete
Single	~$150,000	~$175,000
Married Filing Jointly	~$300,000	~$350,000
Married Filing Separately	~$150,000	~$175,000
Head of Household	~$150,000	~$175,000

The phaseout is based on MAGI and reduces the deduction proportionally. Most workers who earn significant overtime pay are well below these thresholds, but the phaseout can affect dual-income households filing jointly.

How to Claim: Schedule 1-A, Line 2

The Qualified Overtime Deduction is claimed on the new Schedule 1-A, Line 2.

Step-by-Step Process

Identify your overtime pay. Review your W-2 and pay stubs. Your employer should separately identify overtime pay. If your W-2 does not break out overtime, request a year-end pay statement that does.
Confirm you are FLSA non-exempt. If your employer pays you overtime at 1.5x your regular rate, you are almost certainly non-exempt. If you are unsure, check your employment agreement or ask your HR department.
Calculate your MAGI to determine if the phaseout applies.
Enter the lesser of your overtime pay or the maximum deduction (~$12,500 single / ~$25,000 MFJ) on Schedule 1-A, Line 2. Apply the phaseout reduction if applicable.
The Schedule 1-A total flows to Form 1040, Line 8c, reducing your AGI.

This is an above-the-line deduction, so it benefits you whether you take the standard deduction or itemize deductions. It also lowers your AGI, which can improve your eligibility for income-tested credits and deductions.

Detailed Examples and Tax Savings

Example 1: Manufacturing Worker

Carlos works in an auto parts factory. He is an hourly non-exempt employee.

Regular hourly rate: ~$24/hour
Regular weekly hours: 40
Average overtime hours per week: ~10
Overtime rate: ~$36/hour (1.5x)
Annual overtime pay: ~10 hours x ~$36 x 50 weeks = ~$18,000
Filing status: Single
Total W-2 wages: ~$66,000

Calculation:

Qualifying overtime: ~$18,000 (but capped at ~$12,500 for single filers)
Schedule 1-A, Line 2: ~$12,500
Tax bracket: 22%
Federal income tax savings: ~$12,500 x 22% = ~$2,750
Carlos should also review the standard deduction guide and complete tax deductions list for additional savings

Example 2: Nurse (Non-Exempt)

Jessica is a staff nurse at a hospital. She frequently picks up extra shifts.

Base salary equivalent: ~$60,000 (hourly rate ~$29/hour)
Annual overtime pay: ~$8,500
Filing status: Head of Household
MAGI: ~$68,500

Calculation:

Qualifying overtime: ~$8,500 (below ~$12,500 cap)
Schedule 1-A, Line 2: ~$8,500
Tax bracket: 22%
Federal income tax savings: ~$8,500 x 22% = ~$1,870

Example 3: Married Couple, Both Work Overtime

David is a construction electrician and Sarah is a retail supervisor (non-exempt). They file jointly.

David’s overtime pay: ~$15,000
Sarah’s overtime pay: ~$6,000
Combined overtime: ~$21,000
Filing status: MFJ
Combined MAGI: ~$120,000

Calculation:

Qualifying overtime: ~$21,000 (below ~$25,000 MFJ cap)
Schedule 1-A, Line 2: ~$21,000
Tax bracket: 22%
Federal income tax savings: ~$21,000 x 22% = ~$4,620

Example 4: High-Income Couple with Phaseout

Mike is a police sergeant who earns ~$95,000 base plus ~$20,000 in overtime. His spouse Linda earns ~$220,000 as a manager. They file jointly.

Combined MAGI: ~$335,000
Combined qualifying overtime: ~$20,000 (only Mike’s; Linda is FLSA-exempt)
MFJ phaseout begins at ~$300,000

Calculation:

They are ~$35,000 into the ~$50,000 phaseout range (~70% through)
Reduced deduction: approximately ~$6,000 (after ~70% phaseout reduction of the ~$20,000)
Schedule 1-A, Line 2: ~$6,000
Tax bracket: 24%
Federal income tax savings: ~$6,000 x 24% = ~$1,440

Overtime Deduction vs. Tips Deduction: Can You Claim Both?

Yes. If you qualify for both the overtime deduction and the tips deduction, you can claim them separately on Schedule 1-A. Each has its own maximum and phaseout.

Example: A restaurant cook (non-exempt, hourly) who earns ~$8,000 in tips and ~$6,000 in overtime could deduct:

Schedule 1-A, Line 1 (tips): ~$8,000
Schedule 1-A, Line 2 (overtime): ~$6,000
Total Schedule 1-A deduction: ~$14,000

There is no combined cap across Schedule 1-A lines. Each deduction operates independently.

What the Overtime Deduction Does NOT Do

Understanding the limits is just as important as understanding the benefits:

Does NOT eliminate FICA taxes on overtime. Social Security and Medicare taxes still apply to all overtime pay. Only federal income tax is reduced.
Does NOT apply to salaried exempt employees. Even if you work 60-hour weeks as a salaried manager, you do not qualify if you are FLSA-exempt.
Does NOT apply to self-employed individuals. There is no FLSA overtime concept for self-employment. If you are self-employed, see the self-employment tax guide and gig worker deductions guide for deductions available to you.
Does NOT change your employer’s obligation. Your employer must still pay overtime at 1.5x. The deduction is on the employee’s side of the equation.
Does NOT last forever. The deduction is effective for tax years 2025 through 2028 only.

Employer Reporting Requirements

For the deduction to work smoothly, your employer needs to report overtime pay in a way that you can substantiate the claim. The IRS is expected to require or encourage:

W-2 reporting: A new box or code on the W-2 that separately identifies overtime compensation
Pay stub detail: Clear separation of regular pay, overtime pay, and overtime hours on pay stubs
Year-end statements: Employers should provide a summary of annual overtime earnings

If your employer does not break out overtime on your W-2, you will need to document it yourself using pay stubs. Keep all pay stubs for the tax year as supporting documentation.

Impact on Tax Planning

The overtime deduction creates new tax planning opportunities:

For Workers

If you have the option to work overtime, the after-tax value of overtime pay is now higher — your effective take-home from overtime increases
Overtime hours that previously pushed you into a higher tax bracket may now be partially or fully offset by the deduction
If you are near the phaseout threshold, consider the timing of overtime earnings relative to your MAGI

For Employers

Employers may find it easier to attract workers for overtime shifts, since the after-tax compensation is more attractive
No additional employer tax obligation is created — this is a worker-side deduction

Interaction with State Taxes

State conformity varies. States that use federal AGI as their starting point will automatically pass through the benefit. States that decouple from federal changes may not. Check your state’s tax rules for the current year. Filing deadlines and state-specific details can be found at Tax Filing Deadlines 2026.

Frequently Asked Questions

What is the maximum overtime deduction?

The maximum is ~$12,500 for single filers and ~$25,000 for married couples filing jointly. If your qualifying overtime pay is less than the maximum, your deduction equals your actual overtime pay.

Do salaried employees qualify?

Only if they are FLSA non-exempt and receive overtime pay at 1.5x their regular rate. Most salaried employees in professional, executive, or administrative roles are FLSA-exempt and do not qualify.

Can I claim both the overtime deduction and the tips deduction?

Yes. Each has its own cap and phaseout, and they are claimed on separate lines of Schedule 1-A. See our tips deduction guide for details.

Does the overtime deduction reduce my self-employment tax?

No. The deduction does not apply to self-employed individuals, and it does not reduce FICA taxes (Social Security and Medicare) even for employees. It only reduces federal income tax.

What if my employer doesn’t separately report overtime on my W-2?

You can use your pay stubs to calculate and substantiate your overtime earnings. Keep all pay stubs as documentation in case of an IRS inquiry.

How do I know if I am FLSA non-exempt?

If your employer pays you an hourly rate and pays overtime at 1.5x for hours beyond 40 per week, you are almost certainly non-exempt. If you receive a fixed salary regardless of hours worked and never receive overtime pay, you are likely exempt. Your employment agreement or HR department can confirm your status.

Does the deduction apply to double-time pay?

The deduction covers overtime pay as defined by FLSA (1.5x rate for hours beyond 40/week). If your employer pays double-time for certain hours (holidays, for example), the portion that qualifies as FLSA overtime is eligible. Contractual premium pay above the FLSA minimum 1.5x rate may also qualify — consult a tax professional for your specific situation.

When does the overtime deduction expire?

The deduction is available for tax years 2025 through 2028. Returns filed in spring 2026 (for tax year 2025) will be the first to claim it. Check Tax Filing Deadlines 2026 for important dates.

Tax information is for educational purposes only and does not constitute tax, legal, or financial advice. Tax laws are subject to change, and individual circumstances vary. Consult a qualified tax professional or CPA before making decisions based on this information. Taxo.com is not affiliated with the IRS or any government agency.