The overtime tax deduction, decoded.

The "no tax on overtime" deduction covers the premium half of time-and-a-half — up to $12,500 ($25,000 joint). It was the easiest 2025 deduction to miss, because the deductible number isn't on most pay stubs.

By the Master Plan Bookkeeping tax representation practice

IRS-authorized representation practice

Starting with 2025 returns, the premium portion of overtime pay required by the Fair Labor Standards Act is deductible from federal taxable income. The key word is premium: if you earn time-and-a-half, your regular rate is still taxed normally — the deductible part is the extra "half." Work $15,000 of overtime at time-and-a-half and the deduction is $5,000, not $15,000.

That premium-only math is exactly why this deduction was missed so often. Pay stubs show total overtime earnings, not the premium portion, and 2025 W-2s weren't yet required to break the qualified amount out cleanly. Filers who didn't know to divide by three — or whose software asked for a number they couldn't find — left the deduction blank.

The cap is $12,500 for single filers and $25,000 for joint returns, phasing out above $150,000 ($300,000 joint) of income. Only FLSA-required overtime qualifies — the federal time-and-a-half owed for hours past 40 in a week. Like the tip deduction, it works with the standard deduction and runs through 2028.

Maximum Deduction

$12,500 single · $25,000 joint (2025–2028)

What's Deductible

The premium "half" of FLSA time-and-a-half only

Quick Math

Premium ≈ total time-and-a-half OT wages ÷ 3

Income Phase-Out

−$100 per $1,000 of MAGI over $150k ($300k joint)

Itemizing Required?

No — works with the standard deduction

Excluded

Married filing separately; 1099 contractors (no FLSA OT)

— Worked Example —

A factory worker earning $28/hour who averaged 10 overtime hours a week for 48 weeks earned about $20,160 in time-and-a-half wages. The deductible premium is one third — $6,720 — worth roughly $1,478 at the 22% bracket.

Figures above are screening estimates under the 2025 federal rules (P.L. 119-21), not tax advice. A licensed professional confirms actual amounts from your W-2 and filed return before anything is submitted to the IRS. Learn more at the 2025 Refund Checkup.

— Overtime Deduction Questions —

What filers actually ask.

No — only the premium portion. At time-and-a-half, that's one third of your total overtime wages: the "half" above your regular rate. The regular-rate portion of those hours is taxed like any other wages.

For 2025, employers were supposed to report qualified overtime compensation, but transition rules let many approximate or omit it. If your W-2 doesn't show it, a reasonable method is total FLSA overtime wages divided by three — confirmed against your final pay stub of the year. A professional review nails the exact figure before any amendment is filed.

Only overtime required by the FLSA qualifies. Contractual or state-mandated overtime that exceeds what federal law requires — for example, daily overtime rules or double-time provisions — doesn't count toward the deduction beyond the FLSA-required premium.

Yes — Form 1040-X amends your 2025 return to add the deduction, and the IRS issues the difference as a refund, typically in 8–16 weeks. The deduction also applies to 2026, 2027, and 2028 returns, so it's worth getting right going forward.

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