What is the No Tax on Overtime deduction?
The One Big Beautiful Bill Act (OBBBA), signed in July 2025, created an above-the-line federal income tax deduction for the premium portion of FLSA-required overtime pay. Workers can deduct up to $12,500 (single filer) or $25,000 (married filing jointly) per year for tax years 2025 through 2028. The deduction reduces federal income tax only — Social Security and Medicare still apply in full, and state income tax conformity varies state by state.
- →Effective tax years 2025-2028 (sunsets after 2028 unless Congress extends)
- →Up to $12,500 (single) / $25,000 (MFJ) deductible per year
- →Only the premium portion qualifies — the extra half of time-and-a-half, not the full overtime pay
- →Phaseout: deduction reduces by $100 per $1,000 of MAGI above $150K (single) / $300K (MFJ); fully phased at $275K / $550K
- →FICA (Social Security 6.2% + Medicare 1.45%) still applies on every dollar of overtime pay
- →State income tax conformity varies — see the bucketed state list below
Your Pay Details
Your base rate before overtime multiplier.
Standard FLSA threshold is 40.
Hours over 40 paid at 1.5×.
52 minus PTO + unpaid leave.
Federal default is 1.5×. Some union/CA rules use 2× ('double time').
Pre-Tax Deductions (optional)
2026 limit is $23,500 ($31,000 if 50+) per IRS Notice 2025-67.
2026 limit: $4,400 single / $8,750 family.
Your Overtime Tax Breakdown
OBBBA Deduction Analysis
Side-by-Side: Without vs With OBBBA
Your OBBBA savings: $1,650
How TX Treats the OBBBA Deduction
TX has no state income tax — federal savings are your full benefit.
Who qualifies for the No Tax on Overtime deduction?
The deduction applies only to overtime pay required by the federal Fair Labor Standards Act (FLSA), specifically hours worked beyond 40 in a workweek by non-exempt employees. The 'premium' portion — the extra half of time-and-a-half — is what qualifies, not the full overtime pay.
Eligible (FLSA non-exempt hourly workers)
Nurses and clinical staff in hourly roles, firefighters, police officers (non-supervisory), auto mechanics, electricians, plumbers, HVAC technicians, retail and hospitality workers, manufacturing line workers, warehouse staff, hourly truck drivers, restaurant kitchen staff, construction trades, and most other hourly workers earning overtime above 40 hours/week.
Not eligible (FLSA exempt salaried workers)
Salaried managers, professional employees (lawyers, doctors, accountants, engineers earning above the $35,568 federal threshold), computer employees earning above $107,432/year, outside sales staff, and most administrative employees. If you're salaried and don't earn time-and-a-half for hours over 40, you don't qualify regardless of job title.
Edge cases worth knowing
Voluntary overtime negotiated by union contract may not qualify (depends on whether it's FLSA-required). Shift differentials, holiday pay, on-call pay, and bonuses are not OBBBA-eligible. Double-time pay (2× rate) qualifies for the half above 1× — typically the same calculation as 1.5× pay. Self-employed workers and 1099 contractors don't get FLSA overtime, so the deduction doesn't apply to them.
State conformity to the OBBBA overtime deduction
Whether the OBBBA deduction reduces your state income tax in addition to federal depends on your state's federal-AGI conformity policy. Four buckets cover all 51 jurisdictions (50 states + DC):
Conforms — federal + state savings
27 states + DC. Rolling federal-AGI conformity. The OBBBA deduction reduces both federal and state taxable income.
Arizona, Colorado, Connecticut, Delaware, Illinois, Indiana, Kansas, Kentucky, Louisiana, Maryland, Michigan, Missouri, Montana, Nebraska, New Mexico, New York, North Dakota, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, Utah, Vermont, West Virginia, Wisconsin, DC
Non-conforming — federal savings only
6 states. Explicit decoupling or non-AGI starting point. State income tax is calculated on full overtime pay regardless of OBBBA.
California, Massachusetts, New Jersey, Pennsylvania, Arkansas, Mississippi
Pending — likely conform after legislature acts
9 states. Static IRC conformity at a pre-OBBBA date. Treated as non-conforming for safe planning until state legislation passes a conformity update.
Georgia, North Carolina, Virginia, Minnesota, Iowa, Hawaii, Maine, Idaho, Alabama
No state income tax — federal savings are full benefit
9 states. Conformity question is moot.
Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming
How to claim the OBBBA overtime deduction on your tax return
The deduction is above-the-line, meaning you don't need to itemize to claim it. Eligible workers will see qualifying overtime premium pay reported by their employer in two places on Form W-2: Box 1 wages (which includes the premium) and Box 14 with a new IRS-designated code identifying the OBBBA-qualifying premium amount.
On your federal tax return, the deduction is reported on Schedule 1-A of Form 1040. The deduction amount flows from Schedule 1-A to Form 1040 as an adjustment to income, reducing your AGI before the standard or itemized deduction is applied. Mainstream tax software (TurboTax, H&R Block, FreeTaxUSA, TaxSlayer) will prompt for the Box 14 OBBBA amount and handle the Schedule 1-A entry automatically for tax year 2025 returns and forward.
The deduction is subject to the MAGI phaseout described earlier. If your MAGI exceeds $150,000 (single) or $300,000 (MFJ), the deduction reduces by $100 for every $1,000 of MAGI overage. The IRS Tax Withholding Estimator and your employer's Form W-4 do not currently account for the OBBBA deduction, so workers expecting significant savings may want to adjust withholding accordingly to avoid over-withholding throughout the year.
Self-employed workers and 1099 contractors don't qualify because they're not subject to FLSA overtime rules. The deduction is also unavailable for employees in roles that are statutorily exempt from FLSA overtime (Section 13(a) exemptions for certain executive, administrative, and professional employees) — even if they happen to work more than 40 hours/week.
Real-world examples: how the deduction plays out
Three named scenarios showing how the OBBBA deduction works in practice. All examples use 2026 tax brackets, single filer, and assume MAGI under the $150K phaseout threshold.
Example 1: Maria, ER nurse in Texas (no state tax)
Maria earns $34/hour as an ER nurse in Houston, Texas. She works 40 regular hours plus 8 overtime hours per week, 50 weeks per year. Gross income: $68,000 regular + $20,400 overtime = $88,400 total. The premium portion of her overtime (the extra 0.5×) is $6,800/year — well under the $12,500 cap, so all of it is OBBBA-deductible. At her 22% federal marginal rate, the deduction saves her about $1,500/year in federal income tax. Texas has no state income tax, so the federal savings are her full benefit. FICA still applies on the full $88,400.
Example 2: John, firefighter in California (non-conforming state)
John earns $35/hour as a firefighter in Sacramento, California, working 40 regular hours plus 12 overtime hours per week, 50 weeks per year. Gross income: $70,000 regular + $31,500 overtime = $101,500. His OT premium portion is $10,500/year, OBBBA-deductible in full. Federal savings at the 22-24% bracket: about $2,500. Critically, California is non-conforming — the deduction does NOT reduce his California state income tax. His state tax stays calculated on the full $101,500 of wages. Net OBBBA benefit: federal-only savings of about $2,500/year.
Example 3: Carlos, auto mechanic in Pennsylvania (Philadelphia worker)
Carlos earns $28/hour as an auto mechanic at a Philadelphia dealership, working 40 regular hours plus 10 overtime hours per week, 50 weeks per year. Gross income: $56,000 regular + $21,000 overtime = $77,000. OT premium portion: $7,000/year, fully OBBBA-deductible. Federal savings at the 22% bracket: about $1,540. PA is non-conforming, so no PA state savings. As a Philadelphia city resident, Carlos pays the city's 3.75% wage tax on full overtime regardless. Net OBBBA benefit: federal-only $1,540/year. Side note — if Carlos lived across the river in Cherry Hill NJ instead, he'd avoid the Philly city wage tax (~$2,900/year saved on his gross), making the cross-river residency choice bigger than OBBBA's federal savings at this income.
How the OBBBA 'No Tax on Overtime' Deduction Works
The One Big Beautiful Bill Act (OBBBA), signed in July 2025, created a new above-the-line federal deduction for the premium portion of FLSA-required overtime pay. For tax years 2025 through 2028, eligible workers can deduct up to $12,500 (single) or $25,000 (married filing jointly) of qualifying overtime premium pay from their federal taxable income.
Crucially, only the 'premium' portion qualifies — that's the extra half of time-and-a-half. If you earn $30/hour and work 10 OT hours at $45/hour, only the $15/hour premium portion (the $150 in extra pay) counts toward the deduction. The base hourly rate portion of overtime pay does not.
The deduction phases out for high earners: it reduces by $100 for every $1,000 of MAGI above $150,000 (single) or $300,000 (MFJ). It's fully phased out at $275K single / $550K MFJ. FICA still applies in full — the deduction only reduces federal income tax. State tax conformity varies and is not assumed in this calculator.
Workers see this on their W-2: starting in 2025, employers report qualifying overtime premium pay in Box 14 with a new IRS code, and workers claim the deduction on Schedule 1-A of Form 1040. The provision sunsets after tax year 2028 unless extended.
Want to model 401(k) and HSA against your full salary? Open the salary calculator →
Self-employed or freelance? Overtime rules don't apply, but quarterly estimates do — see our freelancer calculator →
Got a sign-on, year-end, or retention bonus on top of overtime? See the bonus calculator →
Heads up: OBBBA "No Tax on Overtime" doesn't extend to FICA →
The 2025-2028 federal income tax deduction on the OT premium portion is real — but FICA (Social Security 6.2% + Medicare 1.45%) still applies to every overtime dollar. See the FICA breakdown for the full picture.
Frequently Asked Questions
What counts as 'qualifying overtime' under OBBBA?
The deduction applies only to overtime pay required by the federal Fair Labor Standards Act (FLSA) — generally hours worked beyond 40 in a workweek by non-exempt employees. Voluntary 'premium pay' negotiated by union contract or shift differentials may not qualify. Salaried/exempt workers (managers, professionals, computer employees over $107,432) generally don't get FLSA OT and so don't qualify.
Does the deduction reduce my Social Security and Medicare taxes too?
No. The OBBBA overtime deduction reduces only federal income tax. Social Security (6.2% up to the $184,500 wage base) and Medicare (1.45% on all wages, plus 0.9% over $200K/$250K) are still owed in full on every dollar of overtime pay.
Is overtime pay 'tax-free' now?
Not entirely. The premium portion (the extra half of time-and-a-half) is deductible up to a cap. In rolling-conformity states (NY, IL, MD, OH, CO, etc.) the deduction reduces both federal AND state income tax, which this calculator now models per-state. In non-conforming states (CA, NJ, PA, MA, AR, MS) the savings are federal-only. FICA still applies in every state. The 'no tax on overtime' marketing line is a simplification; real savings range from a few hundred to a few thousand dollars depending on your bracket, your state, and your OT volume.
Which states honor the OBBBA overtime deduction at the state level?
Three buckets. (1) CONFORMS — rolling federal-AGI conformity, deduction applies at state level: NY, IL, MD, OH, CO, MO, KS, NE, MI, AZ, CT, DE, IN, KY, LA, MT, NM, ND, OK, OR, RI, SC, UT, VT, WV, WI, DC. (2) NON-CONFORMING — explicit decoupling or non-AGI starting point: California, Massachusetts, New Jersey, Pennsylvania, Arkansas, Mississippi. (3) PENDING — static IRC conformity at a pre-OBBBA date, will likely conform once the legislature acts: GA, NC, VA, MN, IA, HI, ME, ID, AL. (4) NO TAX — conformity question moot: AK, FL, NH, NV, SD, TN, TX, WA, WY. This calculator now applies the right treatment automatically based on the state you select.
How long does the OBBBA overtime deduction last?
The deduction is in effect for tax years 2025 through 2028 (four tax years). It sunsets after 2028 unless Congress extends it. The provision was bundled with the TCJA extension in the same act and is structured to expire alongside related individual provisions.
Sources & methodology
- One Big Beautiful Bill Act (OBBBA), signed July 2025. The No Tax on Overtime deduction provision is in the Tax Reform Provisions title. Effective tax years 2025-2028.
- IRS Notice 2025-67 — 2026 retirement plan contribution limits (401(k) employee max $24,500; catch-up $7,500 at age 50+).
- IRS Notice 2025-84 (anticipated) — final OBBBA overtime deduction reporting guidance, including Form W-2 Box 14 code and Schedule 1-A instructions.
- Fair Labor Standards Act, 29 U.S.C. § 207 — defines federal overtime requirements (over 40 hours/week at 1.5× regular rate for non-exempt employees).
- 29 U.S.C. § 213(a) — FLSA Section 13(a) exemptions for executive, administrative, professional, computer, and outside sales employees.
- State conformity classifications based on each state Department of Revenue's stated federal-AGI conformity policy as of Q1 2026. Refresh as state DORs issue OBBBA-specific guidance through 2026.
Reviewed by ProSalaryTax tax research team · Last reviewed May 7, 2026