Sounds good, no overtime tax. But what does it really mean?
The new tax break doesn’t completely eliminate overtime earnings taxes, but if you qualify, it could mean more money in your pocket.
The One Big Beautiful Bill Act (OBBBA) became law on July 4, 2025, and included a new tax break. One is the new deduction for overtime pay.
The deduction is temporary, valid for tax years 2025 through 2028 for overtime pay under Section 7 of the Fair Labor Standards Act (FLSA), which affects about 143 million people. Taxpayers can deduct some of the pay that exceeds their standard rate of pay, so if you get part-time, you can deduct half. Put another way, not all OT you earn is deductible. Only the payment above your normal rate is deducted, and the amount is limited.
The maximum overtime tax deduction is $12,500 or $25,000 for joint filers, and varies according to income level, starting at $150,000 for single filers and $300,000 for joint filers.
The FLSA requires at least minimum wage for all hours worked and overtime not less than time and a half for hours worked in excess of 40 hours, but as you can imagine, there are exceptions.
Determining whether you qualify can be confusing, and there are many caveats. Some information from the Department of Labor may help.
Tax deductions are available whether you itemize or claim the standard deduction on your tax returns. If your income exceeds $150,000 (single filers) or $300,000 (joint filers), you can no longer claim the deduction.
To file, you’ll need a Social Security number, and if you’re married, you must file jointly to claim the deduction.
Hourly employees and other non-exempt employees are eligible for overtime. Most salaried employees are often not eligible. Even if you qualify for federal tax deductions overtime, some state taxes and other payroll taxes may apply.
To claim deductions, you first need to know how much overtime you have worked.
Employers are not required to account for overtime separately for the 2025 tax year, but they may. Your overtime pay may appear on Form W-2, Form 1099-NEC, or Form 1099-MISC.
With more ways for employers to document and pay employees, the IRS says taxpayers can use what they have to estimate overtime, at least through 2025.
So, for example, if you worked and earned a total of $15,000 worth of overtime, eligible overtime is $5,000. $15,000 is divided by three to get half the time for the time and a half payment.
If your average overtime is double time, you find the amount of overtime by taking the total amount and dividing it by four. So if you made $20,000 in overtime, $5,000 would be the amount of qualified overtime.
For the 2026 tax year, employers must include the full amount of qualified overtime on Form W-2 or Form 1099. That means 2025 is the transition year.
Overtime deductions are not automatic. To claim it, you need to fill out Schedule 1-A (Form 1040).
When you file your taxes, this schedule is added to Schedule A.
To complete Schedule 1-A, you’ll need a calculator and some basic math skills. It’s a two-page form, and you only need to fill in the parts that apply to you.
President Trump’s One Big Beautiful Bill Act (OBBBA) became law on July 4, 2025, and introduced several changes to tax deductions, including overtime withholding.
No, the overtime tax deduction is for the 2028 tax year.
Yes. You must file a Schedule 1-A and attach it to your Form 1040.
