Starting with tax year 2025 and running through 2028, qualifying employees can deduct their FLSA overtime premium — the extra half in time-and-a-half — from federal income tax. This is what the news called “no tax on overtime,” though the reality is more precise: it is an above-the-line deduction, capped at $12,500 for single filers ($25,000 for married filing jointly), that reduces your federal taxable income. You still owe Social Security and Medicare on all overtime wages.
What the Law Actually Says
26 U.S.C. §225, added by the One Big Beautiful Bill Act (P.L. 119-21, signed July 4, 2025), creates a deduction for “qualified overtime compensation” — the additional compensation paid under the FLSA, 29 U.S.C. §207 for hours worked beyond 40 in a workweek, specifically the amount equal to 0.5 times the regular rate (not the full 1.5x).
The IRS published guidance and Schedule 1-A Part V for taxpayers to claim these deductions (IRS IR-2026-28).
The Deduction in Numbers
| Single / MFS ineligible | Married filing jointly | |
|---|---|---|
| Maximum deduction | $12,500 | $25,000 |
| Phase-out starts | $150,000 MAGI | $300,000 MAGI |
| Reduction | $100 per $1,000 over threshold | $100 per $1,000 over threshold |
| Phase-out complete | $275,000 MAGI | $550,000 MAGI |
Phase-out rate: $100 per $1,000 of MAGI over the threshold, per 26 U.S.C. §225(b)(2)(A).
Worked Example
A single employee earning $55,000/year works regular time plus an average of 10 hours of overtime per week at their $25/hr regular rate. FLSA requires overtime at 1.5× = $37.50/hr. The overtime premium (the extra 0.5×) is $12.50/hr.
Annual qualified overtime premium: 10 hours/week × $12.50 × 52 weeks = $6,500
Without the deduction:
- AGI: $55,000
- Standard deduction: −$16,100
- Taxable income: $38,900
- Federal income tax: 10% × $12,400 + 12% × $26,500 = $1,240 + $3,180 = $4,420
With the overtime deduction:
- AGI: $55,000
- Standard deduction: −$16,100
- Overtime deduction: −$6,500
- Taxable income: $32,400
- Federal income tax: 10% × $12,400 + 12% × $20,000 = $1,240 + $2,400 = $3,640
- Federal income tax savings: $780 (= $6,500 × 12% marginal rate)
Note: FICA (6.2% + 1.45% = 7.65%) still applies to the full $55,000 including all overtime compensation.
What Does NOT Qualify
- Overtime required only by state law (e.g., daily overtime in California after 8 hours) — only the FLSA component qualifies
- Overtime under a union contract that goes beyond the FLSA standard
- Voluntary extra hours paid at premium by the employer without an FLSA obligation
- Salary-basis employees who are FLSA-exempt (most professional, administrative, and executive employees earning over $684/week)
How This Is Claimed
The deduction is not automatic withholding — it is claimed on your tax return via Schedule 1-A Part V. Because employers generally cannot predict your full-year qualifying overtime at the time of withholding, your regular paycheck withholding typically does not adjust for it. The tax savings arrive when you file.
Consult a tax professional if you are unsure whether your overtime qualifies under the FLSA standard. The deduction interacts with your full income picture; use the federal income tax calculator to estimate the effect on your annual liability.
Putting It in Perspective
The deduction covers only the half-time premium portion of overtime wages — not the full time-and-a-half amount. At a 22% marginal federal rate, a $6,500 qualified overtime premium saves $1,430 in federal income tax. Meanwhile FICA (7.65%) on the total overtime wages ($6,500 × 3 = $19,500 total overtime for the same hours) runs about $1,493. The tax benefit is meaningful but not a complete exemption.
For hourly workers who regularly work overtime, the deduction is most valuable when their MAGI stays below $150,000 (single) and their overtime consistently approaches the $12,500 cap. Workers who occasionally work sporadic overtime in a high-income year may find the deduction partially or fully phased out.
2026 Paycheck Withholding and the Overtime Deduction
Because the deduction is claimed at filing rather than per-paycheck, your employer withholds federal income tax on all overtime wages throughout the year — the deduction does not reduce your paycheck withholding automatically. If your employer does account for it, they must have a record of your FLSA-qualifying overtime hours and wages. Most employers do not adjust withholding for this deduction.
The practical result: you may get a larger-than-expected refund when you file your 2026 return if you had significant qualifying overtime. To manage cash flow, consider entering the expected annual deduction on your W-4’s Deductions Worksheet (Step 4b) to reduce withholding during the year.
Compare this deduction alongside the tips deduction (no tax on tips explained) to understand the full scope of the OBBBA’s paycheck-affecting provisions.