The One Big Beautiful Bill Act (OBBBA) created a temporary federal deduction for “qualified overtime compensation” — new IRC §225, added by OBBBA §70202 (Pub. L. 119-21) — for tax years 2025 through 2028. The part that trips people up isn’t the cap or the phaseout, it’s the definition: the deduction only covers the overtime premium, the extra “half” of time-and-a-half. Your full overtime paycheck, and your regular wages, are still taxed exactly like before.
What Actually Counts as “Qualified Overtime”
Federal law (FLSA §7, 29 U.S.C. §207) requires non-exempt employees to be paid at least 1.5× their regular rate for hours worked over 40 in a week. Say your regular rate is $25/hour:
- Your overtime rate is $25 × 1.5 = $37.50/hour
- Of that, $25/hour is just your base rate — already taxed the same as any other wages
- The remaining $12.50/hour is the premium — the “half” — and that’s the only part IRC §225 lets you deduct
The IRS defines qualified overtime compensation the same way: “overtime compensation required under section 7 of the Fair Labor Standards Act… in excess of the employee’s regular rate of pay.” If your state layers on daily overtime or a richer multiplier than the FLSA minimum, only the FLSA-required premium is federally qualified — not the extra your state or employer contract adds. If you’re salaried and want to check whether you’re even non-exempt in the first place, our salary-to-hourly conversion guide walks through the exempt/non-exempt split.
Worked Example: $25/Hour, 10 Overtime Hours a Week
Take a non-exempt worker earning $25/hour who works 10 hours of overtime in a week:
| Item | Calculation | Amount |
|---|---|---|
| Regular pay (40 hrs) | 40 × $25 | $1,000 |
| Full overtime paycheck (10 hrs) | 10 × $37.50 | $375 |
| — base rate portion of OT | 10 × $25 | $250 (taxed as ordinary wages) |
| — deductible premium | 10 × $12.50 | $125 |
Only $125 of that week’s $375 overtime paycheck — about a third — is eligible for the deduction. Annualized over 52 weeks, that’s $125 × 52 = $6,500 of qualified overtime compensation, comfortably under the $12,500 single-filer cap, so (before any phaseout) the whole $6,500 is deductible. Run your own numbers with the No Tax on Overtime Calculator, which applies your filing status, hours, and rate automatically — or start with the Overtime Pay Calculator if you just need your weekly overtime pay breakdown first.
The Cap and the Phaseout
The deduction is capped and then phased out at higher incomes:
| Filing status | Annual cap | MAGI phaseout starts | Phaseout band | Fully phased out at |
|---|---|---|---|---|
| Single / Head of Household | $12,500 | $150,000 | $125,000 | $275,000 |
| Married Filing Jointly | $25,000 | $300,000 | $250,000 | $550,000 |
| Married Filing Separately | Not eligible | — | — | — |
Above the threshold, IRC §225(b)(2)(A) reduces the deduction by $100 for each $1,000 by which your MAGI exceeds it. The band is therefore the cap divided by that rate — it is not the same width for both filing statuses. A single filer’s $12,500 cap takes $12,500 ÷ $100 = 125 steps of $1,000, a $125,000 band, so the deduction reaches zero at $275,000 of MAGI. A joint filer’s $25,000 cap takes 250 steps, a $250,000 band, zeroing at $550,000. (The tips deduction under §224 has a $25,000 cap at the same $100/$1,000 rate, which is why its band genuinely is $250,000 for everyone — the two provisions are easy to conflate.) Married filing separately doesn’t get a lower cap; it gets no deduction at all, per OBBBA §70202(e). You have to file jointly to claim any amount.
How to Calculate Your Overtime Tax Deduction, Step by Step
- Find your premium pay. Pull your FLSA overtime premium from pay stubs — not your total overtime paycheck. Starting with tax year 2026 W-2s (received January 2027), employers report this in Box 12 code TT. For tax year 2025 returns, the IRS granted transition relief (Notice 2025-62, Notice 2025-69): employers weren’t required to break it out separately, so use your pay records or a reasonable estimate; some employers voluntarily reported it in Box 14.
- Total it for the year. Add up the premium portion across every overtime paycheck.
- Apply the cap. $12,500 (single/HoH) or $25,000 (married filing jointly) — whichever is smaller than your total.
- Apply the MAGI phaseout. If your MAGI is above $150,000 (single/HoH) or $300,000 (joint), subtract $100 for each full $1,000 over the threshold. The deduction hits zero at $275,000 single/HoH and $550,000 joint.
- Report it on Schedule 1-A. The final amount goes on new Schedule 1-A (Form 1040), which flows through to Form 1040 line 13b as an adjustment to income.
Where It Shows Up on Your W-2 and Tax Return
Your qualified overtime compensation is still included in your regular wages in W-2 Boxes 1, 3, and 5 — the deduction doesn’t remove it from your paycheck’s reported wages, it’s a separate line you claim on your return. Box 12 code TT (new for 2026 W-2s) is purely informational, showing your total qualified overtime paid — which, because of the cap and phaseout, may be more than what you can actually deduct.
Common Misconceptions
It’s a deduction, not an exclusion. Overtime pay — including the premium — is still fully reported as wages. The deduction reduces your taxable income on your return; it doesn’t make the pay disappear from your paycheck or your W-2.
FICA still applies. Social Security and Medicare tax (7.65% combined, employee share) is withheld on your entire overtime paycheck, premium included — this deduction only affects federal income tax, not payroll tax.
You don’t need to itemize. This is an above-the-line deduction (Form 1040 line 13b) — you get it whether you take the standard deduction or itemize on Schedule A.
Your state may still tax it. IRC §225 is a federal-only deduction. Whether your state also excludes qualified overtime from state taxable income depends entirely on that state’s own conformity choice — several states currently don’t conform. Check your state’s treatment in our Tips & Overtime Tax by State guide.
Married filing separately gets zero, not a smaller cap. Unlike most phaseouts that simply use a lower threshold for MFS, this deduction is unavailable entirely unless a married couple files a joint return.
Key Takeaways
- Only the overtime premium — the extra half of time-and-a-half — qualifies, not your full OT paycheck.
- Capped at $12,500 (single/HoH) or $25,000 (married filing jointly); phases out $100 per $1,000 of MAGI over $150,000/$300,000.
- Available for tax years 2025-2028, claimed on new Schedule 1-A, whether or not you itemize.
- FICA taxes still apply to the full overtime paycheck — this is a federal income tax deduction only.
- Married filing separately doesn’t qualify at all.
- If you also earn tips, run the No Tax on Tips Calculator — it works the same way, with its own $25,000 cap.