Is Overtime Taxed in 2026?
Overtime is still subject to withholding, Social Security and Medicare taxes, but for tax years 2025 through 2028 eligible workers can deduct qualified overtime pay on their federal income tax return. The deduction is up to $12,500 a year, or $25,000 for joint filers, and phases out above $150,000 of modified AGI ($300,000 joint). It covers only the extra half of FLSA-required time-and-a-half pay, and you do not need to itemize.
The 2025 federal budget law created a temporary income tax deduction for overtime. It is called "no tax on overtime," but it does not make overtime pay completely tax-free.
What the deduction covers
- Qualified overtime compensation: the premium portion of overtime required by the Fair Labor Standards Act, meaning the "half" in time-and-a-half (26 U.S.C. 225). If your regular rate is $20 and you earn $30 an hour for overtime, $10 per overtime hour can qualify.
- Overtime paid only because of a union contract, state law or company policy, beyond what the FLSA requires, generally does not qualify.
Limits
| Item | Amount |
|---|---|
| Maximum deduction | $12,500 per year; $25,000 for married couples filing jointly |
| Phase-out begins | Modified AGI above $150,000; $300,000 for joint filers |
| Years | 2025 through 2028 |
Married people must file jointly to claim it, and you need a valid Social Security number (IRS).
What still applies
- Payroll taxes: Social Security and Medicare taxes still apply to all overtime.
- Withholding: your paycheck still has federal income tax withheld; the benefit comes when you file your return, unless you adjust your W-4.
- State income tax: depends on your state; some states follow the federal deduction and others do not.
No itemizing needed
You can take the deduction whether you itemize or claim the standard deduction (IRS).
How to claim it
For 2025, employers were not required to report qualified overtime separately on Form W-2; workers could calculate it using IRS instructions for Schedule 1-A and pay records (IRS). Keep pay stubs that show overtime hours and rates. Check your W-2 and IRS guidance for later years, which provide for separate reporting.
Who is not eligible
- Exempt employees who are not entitled to FLSA overtime
- Workers paid overtime only under state or contract rules beyond the FLSA requirement
If you are not sure you are being paid overtime correctly in the first place, see who is entitled to overtime pay. For tax disputes, talk to a tax professional or a tax lawyer.
Sources
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This article is general legal information, not legal advice, and reading it does not create an attorney-client relationship. Laws differ by state and change over time; talk to a licensed attorney in your state about your situation.
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