No Tax on Overtime: How the Deduction Works for 2026

"No tax on overtime" is the nickname for a deduction created by the One Big Beautiful Bill Act, signed July 4, 2025. Your overtime is still taxed when you're paid. You get the break when you file your return, or sooner if you update your W-4.

The rules are stricter for 2026 returns, the ones you'll file in early 2027. Your employer now has to list your qualifying overtime on your W-2, and you can only deduct the amount they list. For 2025, you could work out the number yourself from your pay stubs. Below, we explain which overtime counts, how much the deduction saves you, and what to look for on your W-2.

How does no tax on overtime work?

You deduct the overtime premium, the extra half you earn on top of your regular rate, from your taxable income. Your regular-rate pay for those hours stays taxable.

Under the FLSA, most hourly employees must get at least 1.5 times their regular rate for hours over 40 in a workweek. Say you earn $20 an hour and work 45 hours in a week. Your 5 overtime hours pay $30 an hour ($20 × 1.5), so you get $150 for them. That $150 has two parts:

That's why the deductible amount is about one-third of your total overtime pay when you're paid exactly time-and-a-half.

The deduction is "below the line," which means you get it whether you take the standard deduction or itemize. You claim it on Schedule 1-A, a new form attached to your Form 1040.

What counts as qualified overtime?

Qualified overtime is the part of your overtime pay that the FLSA requires, above your regular rate. The tax code calls it "qualified overtime compensation" (26 U.S.C. § 225).

Three things seem to trip people up:

1. Double time only counts as time-and-a-half. If your employer pays double time, only the FLSA-required premium counts. Here's the IRS's example: a worker earning $20 an hour works 10 overtime hours at double time and is paid $400 for them. Only $100 is qualified overtime, the $10-an-hour premium the FLSA requires (IRS FS-2026-13, Q16).

2. State and union overtime don't count unless the FLSA would have required it. California's daily overtime (hours over 8 in a day), overtime for hours over 35 a week, and weekend or holiday premiums only count to the extent the FLSA also requires them. Your employer has to work that out under the FLSA's rules, and the result is what goes on your W-2.

3. Exempt employees don't qualify, even if they're paid overtime. If you're exempt from FLSA overtime, any overtime you get isn't qualified, "regardless of other laws or circumstances" such as a union contract, according to the IRS. Common exemptions include:

• Executive, administrative, and professional employees (including K–12 teachers)

• Outside sales employees

• Certain computer-related jobs

• Some commissioned employees of retail or service businesses

• Several transportation roles, including taxi drivers and certain motor carrier, railroad, and airline employees

Being salaried doesn't automatically make you exempt. Exemptions depend on your duties and pay. If you aren't sure, ask your payroll or HR team whether you're "FLSA non-exempt." Federal employees can check block 35 of their SF-50: "N" means non-exempt.

What changes for your 2026 tax return?

For 2026, the only overtime you can deduct is the amount your employer reports on your Form W-2, box 12, code TT. That's a big change from 2025.

For 2025 returns, employers didn't have to report the amount separately, so the IRS let workers figure it themselves from pay stubs and other records (IRS: What to know about the No Tax on Overtime deduction). That relief ended with 2025. The IRS's August 2026 guidance says the deduction for 2026 through 2028 is limited to what's reported in box 12, code TT (FS-2026-13, Q20).

Here's what that means when your 2026 W-2 arrives (employers must send it by February 1, 2027):

1. Find box 12, code TT. That's your total qualified overtime for the year. It can be more than $12,500. The limits are applied later, on Schedule 1-A.

2. If it's missing or too low, ask your employer for a corrected W-2, called a Form W-2c. You can't deduct the missing amount until you have one.

3. Form 4852 won't work. That's the substitute form people use when an employer never sends a W-2. The IRS says it doesn't count for this deduction (Q23).

4. If the amount is too high, you can only deduct what you were actually paid (Q21). Don't claim an obvious mistake.

Check this early. A W-2c can take weeks, and you'll want it before you file.

How much is no tax on overtime worth?

The deduction is worth your qualified overtime times your federal income tax rate. For most hourly workers, that's a few hundred to a couple of thousand dollars.

Example. Maria earns $28 an hour as a warehouse lead and works about 6 overtime hours a week for 50 weeks, which is 300 hours. She's single.

Her Social Security and Medicare taxes don't change. Neither does any state income tax, unless her state has its own version of the deduction.

Want to see the effect on your whole refund? Try our tax refund calculator, and use the tax bracket calculator to find your top rate.

The income limit and phase-out

If your modified adjusted gross income (MAGI) is over $150,000 ($300,000 on a joint return), the deduction is reduced by $100 for every $1,000 over the line. For most people, MAGI is the same as adjusted gross income (AGI): your total income minus certain adjustments, the number on line 11 of Form 1040.

The reduction comes off your deduction after the $12,500 cap is applied, not off the cap itself (26 U.S.C. § 225(b)(2)). Some calculators get this wrong, so here's how it works:

A single filer at the full $12,500 loses the whole deduction at $275,000 of MAGI. A joint return at the full $25,000 loses it at $550,000.

Do 1099 contractors get no tax on overtime?

Generally, no. The deduction covers overtime required by the FLSA, and the FLSA's overtime rules apply to employees. If you're an independent contractor, you set your own rates and hours, and nobody owes you time-and-a-half.

There's one narrow exception. Some workers are employees under labor law but are treated as independent contractors for tax purposes. If that's you and you're owed FLSA overtime, the payer reports it on Form 1099-NEC (box 1d) or Form 1099-MISC (box 14). The IRS calls this situation rare (FS-2026-13, Q7). If you think you've been misclassified, the Department of Labor's Fact Sheet 13 explains how it decides who's an employee.

Self-employed people have other new deductions to look at. If you earn tips in an occupation on the IRS's list, the no tax on tips deduction can apply to self-employment income too. The qualified business income deduction, worth up to 20% of your business profit, is also now permanent.

If you're self-employed, your biggest tax break is usually your business expenses. You can write off the ordinary and necessary costs of your work, like mileage, your phone, software, and supplies, on Schedule C. Every dollar you write off lowers both your income tax and your 15.3% self-employment tax, something the overtime deduction can't do even for W-2 workers.

Write-offs are easy to miss when they're spread across a year of bank and card statements. Keeper scans your transactions and flags the ones that count, so you don't have to dig through receipts at tax time.

What if you have overtime and a side gig?

You can claim the overtime deduction on your W-2 job and still report your side income normally. The two don't interfere, but the deduction doesn't shrink the extra tax your gig brings.

Say Maria also delivers for DoorDash and clears $9,000 after expenses:

• Her $4,200 overtime deduction lowers her taxable income, which cuts her income tax.

• Her $9,000 gig profit still owes self-employment tax of about $1,270 (15.3% on 92.35% of the profit), plus income tax. The overtime deduction doesn't touch the self-employment tax.

• Her W-2 withholding was set up for her job alone, so she may owe at filing unless she makes quarterly payments or bumps up her withholding.

Writing off gig expenses like mileage, phone, and delivery bags is what lowers that $9,000. If you have a W-2 and a 1099, our guide to filing with a W-2 and a 1099 in the same year walks through the whole return. Keeper can find those write-offs in your bank and card transactions and file both parts of your return.

How do you claim the overtime deduction?

You claim it on Schedule 1-A (Form 1040), Part III. The total from Schedule 1-A goes on Form 1040, line 13b.

1. Enter the full amount from W-2 box 12, code TT. If you had more than one job, add them up.

2. Apply the $12,500 cap ($25,000 joint).

3. Figure your MAGI and apply the phase-out if you're over $150,000 ($300,000 joint).

4. Carry the result to Schedule 1-A's total, then to Form 1040.

To qualify, you also need:

• A Social Security number that's valid for employment and issued before your return's due date. An ITIN doesn't qualify.

• A joint return if you're married. Married filing separately can't claim it. If both spouses have overtime, both need valid SSNs on the return.

Tax software, including Keeper, handles Schedule 1-A for you once you enter your W-2.

Can you get the overtime break in your paycheck instead of waiting for a refund?

Yes. Give your employer a new Form W-4 that includes your expected overtime deduction in step 4(b). The 2026 W-4 was updated for this, and the step 4(b) deductions worksheet walks through it (FS-2026-13, Q9).

Until you do, your employer has to keep withholding on overtime as usual. It isn't allowed to reduce your withholding just because the deduction exists (Q8). The IRS Tax Withholding Estimator has also been updated to include the deduction.

Estimate low. If your overtime drops off and you've already cut your withholding, you could owe at tax time. And if you have a side gig, any withholding you free up may be better spent covering the tax on that income.

Does no tax on overtime apply to state taxes?

It depends on your state. The deduction is federal, and each state decides whether to follow it. Many states start their calculation from federal adjusted gross income. This deduction is taken after AGI, so it doesn't automatically flow through. Check your state revenue department's guidance before assuming your state tax will drop.