No Tax on Overtime Explained: The FLSA Premium, Caps and Examples

The overtime deduction lets eligible workers deduct "qualified overtime compensation" on Schedule 1-A for tax years 2025 through 2028. The phrase sounds like it covers every overtime dollar, but it does not. It covers one specific slice of pay, defined by a federal labor law that dates back to 1938. Understanding that slice is the key to estimating the deduction correctly.

The Fair Labor Standards Act sets the boundary

Section 7 of the Fair Labor Standards Act requires employers to pay covered, non-exempt employees at least one and a half times their regular rate for hours worked over 40 in a workweek. Qualified overtime compensation for the tax deduction is the amount paid in excess of the regular rate because of that rule. In other words, it is the premium — the half — and only to the extent federal law required it.

Take a warehouse associate earning $24 an hour who works 48 hours in a week. The eight overtime hours are paid at $36, a total of $288. Of that, $192 is ordinary pay at the regular rate and $96 is the premium. Only the $96 is qualified overtime. Over a year with that pattern in 40 weeks, the qualified amount is $3,840.

What the "regular rate" includes

The FLSA regular rate is not always your base hourly wage. Nondiscretionary bonuses, shift differentials and certain commissions are folded into it, which raises the overtime premium. That is one reason the most reliable figure is the one your employer reports: payroll systems compute the regular rate each week. For 2025, employers were not required to show the amount separately and the IRS allowed workers to use reasonable methods. For 2026 wages, employers are expected to report qualified overtime separately, which should make the number on your year-end statement the starting point.

Three common ways to estimate it

If you have your pay stubs, you can usually estimate the premium in one of three ways, and the overtime calculator supports each:

• From hours: regular rate × 0.5 × overtime hours. Add it up across weeks.
• From total overtime pay: if a stub shows overtime pay at time-and-a-half, one third of that figure is the premium, because 0.5 is one third of 1.5.
• From an employer statement: use the qualified amount reported for the year.

Double time, daily overtime and contracts

Many workers receive more than the federal minimum. California requires overtime after eight hours in a day and double time after twelve; union contracts often pay double time on Sundays or holidays. Those payments are welcome, but the deduction follows the federal rule only. If a day's overtime would not have been required by the 40-hour federal workweek test, the premium is not qualified. If you work double time during hours that are also over 40 for the week, only the half-time premium the FLSA would require counts; the extra half paid under the contract does not. Workers in states with daily overtime should expect the qualified amount on their year-end statement to be smaller than the overtime line on their pay stubs.

Exempt employees do not qualify

Salaried managers, many professionals and certain other employees are exempt from FLSA overtime. If an employer chooses to pay an exempt employee extra for a long week, that payment is not FLSA-required and is not qualified overtime. The same is true for employees of employers not covered by the FLSA. If you are unsure whether you are exempt, your job classification on your offer letter or HR portal is a starting point, and the Department of Labor publishes guidance on the exemptions.

The cap and the phase-out

The deduction is limited to $12,500 a year, or $25,000 on a joint return. On a joint return the cap is shared, but both spouses' qualified overtime counts toward it. It is reduced by $100 for each $1,000 of modified AGI above $150,000 ($300,000 for joint filers), with the excess rounded down to whole thousands as Schedule 1-A instructs. For most hourly workers the phase-out never applies; it matters for two-earner households with significant overtime, such as nurses, police officers or skilled trades workers with heavy overtime seasons.

Eligibility conditions beyond the pay itself

As with the tips deduction, married people must file jointly and you need a Social Security number valid for employment. The deduction is available whether or not you itemize. It does not change Social Security and Medicare withholding, and it does not lower AGI.

Worked example for a two-earner household

Dev and Ana file jointly. Dev is an hourly electrician with $14,000 of qualified overtime premium on his employer statement. Ana is a nurse with $9,000. Combined that is $23,000, under the $25,000 joint cap. Their MAGI is $265,000, below the $300,000 threshold, so their deduction is the full $23,000. In the 24% bracket, that is worth about $5,520 of federal income tax. If their MAGI had been $320,500 instead, the excess of $20,500 would round down to 20 thousands, reducing the deduction by $2,000 to $21,000.

Common mistakes to avoid

The most frequent error is deducting the full overtime line from a pay stub. A worker whose stubs show $15,000 of overtime pay at time-and-a-half has a qualified premium of about $5,000, not $15,000. A second mistake is counting overtime from a second job without checking whether that employer is covered by the FLSA and whether the hours were over 40 at that employer; hours at two different, unrelated employers are not combined for the federal workweek test. A third is forgetting that a bonus folded into the regular rate also increases the premium, which can make the employer's figure higher than a simple rate-times-hours estimate. Finally, some people assume the deduction lowers their payroll tax. It does not: Social Security and Medicare tax are withheld on all overtime pay as before.

What to do now

• Look at a recent pay stub and identify how overtime is shown: hours, rate and total.
• Estimate the premium for the year with the calculator and compare it with the cap.
• If you live in a daily-overtime state, estimate conservatively until you see the employer's figure.
• Consider whether a new Form W-4 makes sense; our withholding guide explains the trade-offs.

This guide summarizes IRS guidance and is not tax advice. Check the current Schedule 1-A instructions before filing.