No tax on overtime: how the deduction actually works

Only the premium counts

The IRS defines qualified overtime as the part of FLSA-required overtime pay above your regular rate.

The IRS explains that qualified overtime compensation is overtime pay required under section 7 of the Fair Labor Standards Act that exceeds your regular rate. If you are paid one and one-half times your regular rate for an overtime hour, only the “half” is qualified overtime. If your employer pays double time, only the half-time portion the FLSA requires counts.

You also have to be an FLSA overtime-eligible employee: covered by the Act and not exempt from its overtime rule. The IRS calls that a fact-specific question that depends on occupation, duties, and earnings, and points to Department of Labor guidance.

The IRS worked examples

Dividing total overtime pay is the shortcut the IRS itself uses.

Why divide by three: at time-and-a-half, each overtime hour pays 1.5 times the regular rate, and the premium is 0.5 of that 1.5 — one third. At double time the FLSA premium is 0.5 of 2.0, one quarter.

The limit and the income phase-out

Up to $12,500 per return, or $25,000 on a joint return.

On Schedule 1-A the deduction is the smaller of your qualified overtime or $12,500 ($25,000 if married filing jointly). It is then reduced if modified adjusted gross income is over $150,000 ($300,000 joint): the amount over the threshold is divided by $1,000, rounded down to a whole number, and multiplied by $100.

Example: a single filer with $5,000 of qualified overtime and MAGI of $160,500 is $10,500 over. That is 10 full thousands, so the reduction is $1,000 and the deduction is $4,000. The odd $500 costs nothing.

Who can claim it

A few conditions apply regardless of the amount.

• The IRS describes the deduction as available for tax years 2025 through 2028.
• You need a Social Security number valid for employment, included on the return.
• If you are married, you must file a joint return to claim it.
• It is available whether you itemize or take the standard deduction.

Where your number comes from

Reporting depends on the tax year.

For tax year 2025 the IRS did not require employers to report qualified overtime separately on Forms W-2, 1099-NEC, or 1099-MISC. Some employers used box 14 of the W-2, an online portal, or a separate statement. Without one, the IRS says to use the Schedule 1-A instructions to work out the amount from your pay records — the division shortcuts above are the ones its examples use. The deduction is claimed in Part III of Schedule 1-A.

What the deduction is worth

A deduction lowers taxable income, not tax, dollar for dollar.

The saving is roughly the deduction multiplied by your federal income tax bracket. A $5,000 deduction is worth about $600 in the 12% bracket and about $1,100 in the 22% bracket. Social Security and Medicare taxes are figured on wages rather than taxable income, so they are unchanged, and state income tax treatment depends on your state.

Not tax advice. Figures follow the 2025 Schedule 1-A. Check the current year’s form and instructions, or ask a tax professional, before you file.