Updated for tax year 2026
If you regularly work overtime, a new federal tax deduction could help lower your taxable income. The No Tax on Overtime deduction allows eligible workers to deduct certain qualified overtime pay from their federal income tax return. Despite the name, overtime pay isn’t completely tax-free now. Your overtime wages are still taxable, but you may be able to deduct the qualifying portion when you file your return.
Whether you’re picking up late-night shifts, working weekends, or clocking extra hours to make ends meet, here’s what to know about the No Tax on Overtime deduction for 2026 and how TaxAct® can help you claim it when it’s time to file.
Note: The One Big Beautiful Bill (OBBB) is now also being referred to by lawmakers as the Working Families Tax Cut Act. You may see one or both names used here, but they refer to the same set of tax changes.
At a glance:
- The No Tax on Overtime deduction lets eligible workers deduct certain qualified overtime pay from federal taxable income for tax years 2025-2028.
- For 2026, the maximum deduction is $12,500 ($25,000 for married joint filers), subject to income phaseouts.
- Only the qualified overtime premium required under the Fair Labor Standards Act (FLSA) counts as deductible, not all overtime wages.
- Beginning in 2026, employers must separately report your qualified overtime compensation on Form W-2, box 12, code TT.
- Overtime pay is not completely tax-free. It can still be subject to federal withholding, Social Security and Medicare payroll taxes, and applicable state taxes.
- You can claim the deduction whether you take the standard deduction or itemize, but married taxpayers must file jointly to qualify.
Did the No Tax on Overtime deduction pass?
Yes, the Working Families Tax Cut Act (One Big Beautiful Bill Act), enacted in July 2025, created a new federal income tax deduction for qualified overtime compensation. This doesn’t mean your overtime wages are completely tax-free. Instead, you may be able to claim a deduction for qualified overtime pay that can reduce your federal taxable income.
The deduction first became available for tax year 2025 and, under current law, is scheduled to remain in effect through tax year 2028.
When does No Tax on Overtime start?
The deduction became effective for tax years beginning after Dec. 31, 2024.
Here’s what that means:
- Tax year 2025 was the first year taxpayers could claim the deduction.
- Tax year 2026 is the first year employers and other payors must separately report qualified overtime compensation to taxpayers.
- The deduction is scheduled to expire after tax year 2028 unless Congress changes the law.
The reporting rules for 2026 are particularly important because certain special transition rules available for 2025 may no longer apply.
How does the No Tax on Overtime deduction work?
Here’s a breakdown of the One Big Beautiful Bill No Tax on Overtime deduction for 2026:
| No Tax on Overtime rule | What it means | Example |
| Maximum deduction | Up to $12,500 per return ($25,000 if married filing jointly). | A single taxpayer with $8,000 of qualified overtime pay could potentially deduct the full $8,000 if otherwise eligible. |
| Type of deduction | Below-the-line: The deduction reduces taxable income but does not reduce adjusted gross income (AGI). You can claim it whether you take the standard deduction or itemize. | If you qualify for a $5,000 deduction, that deduction can reduce taxable income even if you claim the standard deduction. |
| Social Security number requirement | The person who received the qualified overtime compensation must have a Social Security number valid for employment that was issued by the return due date, including extensions. | A taxpayer without an SSN valid for employment cannot claim the deduction (even if they worked overtime). |
| Married taxpayers | If married, you must file jointly to claim the deduction. | A married taxpayer with $4,000 of qualified overtime pay who files separately from their spouse cannot claim this deduction. |
| Income phaseout | Phase out starts once your modified adjusted gross income (MAGI) exceeds $150,000 ($300,000 for joint filers). If you qualify for the full deduction, it phases out completely at $275,000 of MAGI ($550,000 for joint filers). | A single filer qualifies for the full $12,500 deduction. Once their MAGI goes over $150,000, that deduction starts getting smaller and is fully phased out by $275,000 MAGI. |
| Phaseout rate | For every $1,000 over the MAGI limit, the deduction is reduced by $100. | A single filer with a MAGI of $155,000 ($5,000 over the limit) can claim a max deduction of $12,000. |
| Deductible portion of overtime pay | In a typical time-and-a-half arrangement, only the premium above your regular rate (the “extra” half) required under the FLSA qualifies. | If your regular pay rate is $20 per hour and your required overtime rate is $30, only the extra $10 per hour is deductible — not the full $30. |
| Tips are separate | Tips are not qualified overtime compensation. Instead, you may qualify for the No Tax on Tips deduction. | Tips earned during an overtime shift are not added to the overtime deduction. |
Who qualifies for the No Tax on Overtime deduction?
The deduction generally applies to workers who receive overtime pay required under Section 7 of the Fair Labor Standards Act of 1938 (FLSA).
For your overtime to qualify, you must be both:
- covered by the FLSA, and
- eligible for the FLSA’s overtime protections (not exempt).
For many workers, that means receiving overtime pay after working more than 40 hours in a workweek. Below, we’ve provided some examples based on job type.
Hourly and nonexempt employees
Hourly workers and other employees who are classified as FLSA nonexempt may qualify if they receive federally required overtime compensation. Being paid hourly does not, by itself, guarantee your eligibility, but the FLSA overtime rules cover many hourly workers.
Salaried employees
A salaried employee may qualify if they’re nonexempt under the FLSA and entitled to overtime protections.
However, exempt salaried employees generally do not qualify for this deduction because they aren’t entitled to overtime under FLSA rules.
Business owners
Most business owners won’t qualify for the overtime deduction. For example, an employee who owns at least a 20% equity interest in a business and is actively involved in managing it is generally treated as exempt from the FLSA overtime requirements.
Employees with a smaller ownership interest may still qualify, depending on whether another FLSA exemption applies.
Independent contractors and self-employed workers
Most independent contractors, gig workers, and self-employed individuals won’t qualify. Working extra hours or charging a higher “overtime” rate doesn’t make independent-contractor income eligible for the deduction.
However, there is one rare exception where a worker may be treated as an employee for FLSA purposes but as an independent contractor for federal tax purposes. In those cases, qualified overtime pay may be reported on Form 1099-NEC or Form 1099-MISC rather than Form W-2. See this IRS Fact Sheet (Topic C) for more info.
Federal employees
Some federal employees may qualify, but special rules apply. Check your Standard Form 50 (SF-50), block 35:
- N generally means nonexempt, or FLSA overtime-eligible.
- E generally means exempt, or FLSA overtime-ineligible.
If you’re unsure how your qualified overtime pay was calculated, contact your agency’s HR or payroll office.
What counts as qualified overtime compensation?
The deduction does not apply to every dollar you earn while working overtime — that’s a common misconception.
For most workers covered by the standard FLSA overtime rules, qualified overtime compensation generally means the extra overtime premium you receive above your regular rate of pay.
We’ll walk through a few examples below to show how this works in practice.
Note: Extra pay required only by an employer policy, contract, or collective bargaining agreement may not qualify if it goes beyond what federal overtime law requires. In addition, paid time off typically does not count as hours worked when determining whether you’ve met the FLSA overtime threshold.
Example: Standard time-and-a-half pay
Say your regular rate is $20 per hour, and your employer pays you $30 per hour for FLSA-required overtime.
Here’s the breakdown of that $30 per hour overtime rate:
- $20 is your regular pay rate (not deductible)
- $10 is the required extra one-half overtime premium pay (deductible)
So, the full $30 rate isn’t deductible. Instead, only the $10 overtime premium typically counts as deductible qualified overtime compensation.
What if your employer pays double time?
Getting paid more than the FLSA requires doesn’t necessarily mean you get a bigger deduction.
For example, suppose your regular rate is $20 per hour, and your employer voluntarily pays you $40 per hour for working holidays.
If the FLSA only requires time-and-a-half pay, the qualifying amount is limited to the premium required under federal law. In this example, the deduction would be limited to $10 per overtime hour, rather than the full additional $20 double-time rate.
What about special FLSA overtime arrangements?
Special rules may apply to certain workers, including some:
- Hospital and residential care employees
- Law enforcement personnel
- Firefighters
- State and local government workers receiving compensatory time
- Federal employees
In these situations, overtime may be calculated differently than the standard “more than 40 hours in a workweek” rule. Qualified overtime is generally based on the overtime premium paid under the FLSA rule that applies to your specific job.
For 2026, you generally won’t need to calculate the qualified amount yourself. Your employer or payor is usually responsible for determining it and reporting it separately on your tax form, but we included two examples below.
Example: law enforcement officer
Say you’re a police officer who earns a regular rate of $30 per hour and your department uses a qualifying 14-day FLSA work period instead of the standard 40-hour workweek.
When you work overtime hours that qualify under that special FLSA rule, you’re paid $45 per hour:
- $30 is your regular pay rate.
- $15 is the additional one-half overtime premium.
For purposes of the No Tax on Overtime deduction, the $15 overtime premium is your qualified overtime compensation — not the full $45 hourly rate.
The main difference for workers like police officers is that the point at which overtime kicks in can be based on a special FLSA work period (14 days in this case) rather than the usual 40-hour workweek.
What about compensatory time?
Some state and local government employees may receive compensatory time (comp time) instead of cash overtime pay.
Under certain FLSA rules, an eligible public-sector employee can earn comp time at a rate of 1.5 hours for each overtime hour worked. When that comp time is later used and paid out as wages, part of the payment may count as qualified overtime compensation.
Example: compensatory time
Say you earn $30 per hour and your department gives you 1.5 hours of comp time for each qualifying overtime hour you work.
When you later use that comp time, you receive $45:
- $30 is your regular pay rate.
- $15 is the extra one-half overtime premium.
The $15 premium portion is what counts as qualified overtime compensation for the No Tax on Overtime deduction in this instance.
Is comp time the same as PTO?
No. Comp time and regular paid time off (PTO) aren’t the same thing.
Comp time is earned because you worked qualifying overtime hours and, in certain public-sector jobs, received paid time off instead of cash overtime.
Regular PTO (such as vacation days, sick leave, or personal days) is an employee benefit you can use even though you didn’t work those hours. PTO typically does not count as hours worked when determining whether you’ve reached the FLSA overtime threshold.
The main difference is that comp time can be tied directly to overtime you already worked, while ordinary PTO is typically a separate benefit.
How much overtime pay can you deduct in 2026?
The maximum deduction is:
- $12,500 per return for taxpayers who are not filing a joint return
- $25,000 per joint return for married couples filing jointly
One important detail: The $25,000 limit applies to the joint return as a whole, not $12,500 per spouse. This means one spouse could potentially account for the full $25,000 deduction even if the other spouse didn’t receive any qualified overtime pay.
Example: married filing jointly
Suppose Spouse A has $25,000 of qualified overtime compensation, while Spouse B has none.
If they file a joint return and otherwise meet the requirements, they could potentially claim the full $25,000 deduction (subject to the income phaseout and other eligibility rules).
If both spouses receive qualified overtime compensation, their combined deduction is still capped at $25,000 per joint return, even if their combined qualified overtime pay exceeds that amount.
What are the income limits for the overtime deduction?
The deduction starts to phase out once your MAGI exceeds:
- $150,000 if you’re not filing jointly
- $300,000 if you’re married filing jointly
Once you cross those thresholds, the deduction shrinks by $100 for every $1,000 (or part of $1,000) that your MAGI is over the limit.
If you qualify for the maximum deduction, it phases out completely at:
- $275,000 of MAGI for non-joint filers
- $550,000 of MAGI for joint filers
Keep in mind that if your qualified overtime deduction is less than the maximum to begin with, your deduction could phase out completely at a lower income level.
Example: smaller deductions can phase out sooner
Say you’re a single filer with $5,000 of qualified overtime pay and $200,000 of MAGI.
The phaseout starts at $150,000, so you’re $50,000 over the MAGI threshold. That reduces your deduction by $5,000 (50 × $100 = $5,000).
Since your deduction was only $5,000 to begin with, it’s fully phased out at your current MAGI of $200,000.
How is qualified overtime reported in 2026?
This is one of the biggest changes from 2025. Beginning with tax year 2026, employers and other payors must separately report qualified overtime compensation on your tax form.
For most employees, you will find this figure on Form W-2, box 12, code TT.
Code TT shows the amount of qualified overtime compensation your employer reported for the year. See our full list of Form W-2, box 12 codes.
In rare cases where a worker is treated as an employee under the FLSA but as an independent contractor for federal tax purposes, qualified overtime may instead appear on:
- Form 1099-NEC, box 1d
- Form 1099-MISC, box 14
For most taxpayers, though, Form W-2, box 12, code TT is the number to look for.
Is the amount in W-2, box 12, code TT, automatically your deduction?
Not necessarily. The amount reported under code TT shows your qualified overtime compensation for the year, but your final deduction can be lower depending on the deduction limits, your income, and other eligibility rules.
When you file, you’ll use the code TT amount when completing the qualified overtime section of Schedule 1-A (Form 1040), Additional Deductions. TaxAct can help walk you through this process.
Your final deduction may also be affected by:
- The $12,500 or $25,000 deduction caps
- MAGI phaseouts
- Your filing status and other eligibility requirements
Examples
Let’s say your employer reports $10,000 in Form W-2, box 12, code TT.
You would start with the full $10,000 when completing the qualified overtime portion of Schedule 1-A. If you meet the other requirements and your income doesn’t reduce the deduction, you could potentially deduct the full $10,000.
But if your W-2 instead reports $20,000 and you are a single filer, your allowable deduction would be capped at $12,500 (before considering any income-based phaseout).
What if code TT is missing or incorrect on your W-2?
For 2026, you shouldn’t calculate missing qualified overtime from your pay stubs to calculate the deduction yourself. Instead, start by contacting your employer if you think your overtime compensation doesn’t look correct. Ask for a corrected Form W-2c, Corrected Wage and Tax Statement.
A substitute Form 4852 also does not satisfy the separate reporting requirement for this deduction.
How is 2026 different from 2025?
Tax year 2025 was a transition year for the new overtime deduction, so the IRS allowed additional flexibility as employers adjusted to the new rules.
Because employers weren’t required to report qualified overtime compensation for 2025 separately, workers could use certain “reasonable methods” and payroll records to figure out their eligible amount, including:
- Pay stubs
- Payroll statements
- Employer-provided records
- Reasonable calculations of the federally required overtime premium
But those special transition rules generally don’t apply for 2026.
Beginning in 2026, employers must report qualified overtime separately. For most employees, that means using the amount in Form W-2, box 12, code TT, when claiming the deduction, rather than calculating your own amount from pay stubs or other payroll records.
How do you claim the No Tax on Overtime deduction?
When it’s time to file your 2026 federal individual income tax return, start by gathering your year-end tax documents. Our tax preparation checklist can help you get started. For official guidance, see the IRS overview of the No Tax on Overtime deduction.
If you’re an employee, check Form W-2, box 12, code TT for your reported qualified overtime compensation.
The deduction is currently calculated on the qualified overtime section of Schedule 1-A (Form 1040), Additional Deductions.
Here’s how the process works:
- Find the qualified overtime amount reported on your tax form (likely your W-2).
- Enter that amount in the qualified overtime section of Schedule 1-A.
- Apply the $12,500 or $25,000 maximum deduction, depending on your filing status.
- Apply any required MAGI phaseout.
- Make sure you meet the applicable SSN and filing-status requirements.
- Report the final deduction on your federal income tax return as directed by the form instructions.
As always, if you decide to file with TaxAct, we walk you through the applicable tax forms and crunch the numbers for you, so you don’t have to do any of these calculations manually.
Does the overtime deduction change your paycheck withholding?
Not automatically. Qualified overtime compensation is still generally subject to federal income tax withholding when your employer pays it. That said, Form W-4 now allows employees to account for an expected qualified overtime deduction in Step 4(b).
If you expect to qualify for the overtime deduction, you can submit a new Form W-4 to your employer so your withholding better reflects the deductions you expect to claim when you file your return.
FAQs about the no tax on overtime deduction
The bottom line
The No Tax on Overtime deduction could be a valuable tax break for workers who receive overtime pay required under the FLSA. For 2026, the biggest thing to remember is that qualified overtime is now reported separately by your employer. For most employees, that means checking Form W-2, box 12, code TT for the amount your employer reported. It’s also important to know the deduction limits, income phaseouts, and what portion of your overtime pay actually qualifies.
Want to learn more about this tax break, plus other OBBBA tax changes? Watch our video for more answers to your tax questions.
When you’re ready to file your 2026 return, TaxAct can walk you through the overtime deduction, apply the deduction limits and income phaseouts for you, and help make sure you’re getting the most out of your overtime deduction.
This article is for informational purposes only and not legal or financial advice.
All TaxAct offers, products and services are subject to applicable terms and conditions.
The One Big Beautiful Bill is now also being referred to by lawmakers as the Working Families Tax Cut Act. You may see one or both names used here, but they refer to the same set of tax changes.
Citations
Ponder, Meghen. “What Is Form W-2, and How Does It Work?.” TaxAct Blog, 10 Oct. 2024.
Ponder, Meghen. “Understanding Adjusted Gross Income (AGI).” TaxAct Blog, 21 Oct. 2025.
Ponder, Meghen. “OBBB Limits Tax Credits for ITIN Filers Without SSNs.” TaxAct Blog, 24 Oct. 2025.
Ponder, Meghen. “No Tax on Tips: What Tipped Workers Need to Know About the New Deduction.” TaxAct Blog, 10 Apr. 2026.
Ponder, Meghen. “Understanding the 1099-NEC Form: A Complete Guide.” TaxAct Blog, 1 Aug. 2025.
Ponder, Meghen. “Form 1099-MISC: What It Is and How to Use It.” TaxAct Blog, 1 Aug. 2025.
Internal Revenue Service. “Updates to Questions and Answers About the New Deduction for Qualified Overtime Compensation.” FS-2026-13, Aug. 2026.
Internal Revenue Service. “About Form W-2 C, Corrected Wage and Tax Statements.” IRS.gov, 25 June 2026.
Internal Revenue Service. “About Form 4852, Substitute for Form W-2, Wage and Tax Statement, or Form 1099-R.” IRS.gov, 31 Mar. 2026.
TaxAct. “Form 1040 Tax Preparation Checklist.” TaxAct, n.d.
Internal Revenue Service. “Schedule 1-A, Additional Deductions: What to Know About the New Form.” IRS.gov, Mar. 2026.
TaxAct. “Refund Booster (W-4 Calculator).” TaxAct, n.d.
TaxAct. “What’s in the One Big Beautiful Bill (OB3)? Your Tax Questions Answered.” TaxAct Blog, 14 Oct. 2025.
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