The phrase 'no tax on overtime' spread quickly when the One Big Beautiful Bill Act (OBBBA) was signed into law, but it overstates what the legislation actually does. The OBBBA does not exempt overtime pay from all taxes. It creates a temporary federal income tax deduction of up to $12,500 per year for single filers ($25,000 for married filing jointly) for the premium portion of FLSA-required overtime pay — the amount above your regular rate, such as the 'half' in time-and-a-half. It is claimed on Schedule 1-A and reduces taxable income (it does not reduce AGI). Social Security and Medicare taxes (FICA) still apply to every dollar of overtime you earn. State income taxes apply unless your state has separately conformed. And the deduction is capped — overtime earnings above the deduction limit are still fully taxable. This guide cuts through the misconceptions, walks through the real dollar savings at each federal bracket, explains exactly who qualifies under FLSA rules, and covers the two critical expiry mechanisms built into the law: the income phase-out (based on modified AGI) and the December 31, 2028 sunset date.
When politicians and media described the OBBBA as 'no tax on overtime,' they were using shorthand for a more limited provision. Understanding the precise legal mechanism is essential for calculating your real benefit — and for avoiding disappointment at tax time.
The OBBBA creates a deduction (claimed on Schedule 1-A) — not a tax exemption, not a credit, not a zero-tax zone. A deduction reduces the amount of income subject to tax. Only the premium portion of overtime pay — the amount above your regular rate — is deductible. If you earn $18,000 in overtime paid at time-and-a-half, the premium is one third of that pay, or $6,000, so only $6,000 is shielded from federal income tax (well under the $12,500 single cap). The remaining $12,000 of overtime pay is taxed normally. And regardless of the deduction, all $18,000 of your overtime remains subject to FICA.
The deduction targets federal income tax only. It does not reduce:
The benefit of a deduction depends on your marginal federal income tax rate. This is what a full $12,500 deduction actually saves at each bracket:
Reaching the full $12,500 deduction takes $37,500 of overtime pay at time-and-a-half (a $12,500 premium, one third of the pay); with less overtime the deduction — and the saving — is proportionally smaller. These are meaningful savings — $2,750 a year is real money — but they are far from 'no tax.' Most workers earning significant overtime will still pay FICA plus state income tax on their overtime pay regardless of the federal deduction. Use the No Tax on Overtime Calculator to see your personalised estimate including FICA and your state.
The deduction is claimed on Schedule 1-A and carried to Form 1040 as a deduction that reduces taxable income — it does not reduce AGI. This matters because AGI is the starting point for many other tax calculations (other deductions, credit phase-outs, student loan interest and more), and those are not made smaller by this deduction. It is still valuable because it is available whether you take the standard deduction or itemise.
The mechanics of the deduction are straightforward once you understand the caps, the income thresholds, and how AGI placement works in practice.
The deduction cap depends on filing status:
If a married couple both work overtime, their combined deduction cap is $25,000 — not $25,000 each. If you earn $60,000 in overtime pay at time-and-a-half (a $20,000 premium) and your spouse earns $45,000 (a $15,000 premium), your combined premium is $35,000, but the deduction is capped at $25,000 MFJ, not $35,000 or $50,000.
Worker: single, $65,000 base salary + $18,000 overtime pay = $83,000 gross wages. Assumption: the overtime is paid at time-and-a-half, so the deductible premium is one third of the overtime pay ($18,000 ÷ 3 = $6,000).
The net federal income tax benefit is $1,320 for the year. This is claimed when you file — most payroll systems will not automatically reduce withholding for the OBBBA deduction unless you adjust your W-4.
The statute (26 U.S.C. 225(c)) defines qualified overtime compensation as FLSA-required overtime pay that is in excess of your regular rate — the overtime premium, the extra 50% at time-and-a-half — not the full overtime pay amount. If your regular rate is $20/hour and you earn $30/hour for overtime, only the extra $10 per overtime hour (the premium) counts toward the $12,500 deduction cap. Use the No Tax on Overtime Calculator to estimate your deduction, and consult a tax professional for your specific situation.
You claim the deduction on Schedule 1-A (Form 1040); the total carries to Form 1040 as a deduction that reduces taxable income (line 13b on the 2025 form), not AGI. You do not need to itemise to claim it. Employers and other payors must report the total qualified overtime compensation on statements furnished to you, and the IRS provided transition relief for tax year 2025. Keep your own pay stubs and records showing the overtime premium, and check the instructions for the tax year's forms for line numbers.
The single biggest misconception about the OBBBA overtime provision is that it eliminates all taxes on overtime. It does not — and understanding why FICA is separate is essential for an accurate take-home pay calculation.
FICA stands for the Federal Insurance Contributions Act and covers two taxes:
Combined employee FICA: 7.65% on all wages, including overtime. There is no OBBBA exemption, no cap, no phase-out — FICA applies to the first dollar and every dollar of overtime you earn.
Worker earning $18,000 in overtime for the year:
This $1,377 is owed regardless of the income tax deduction. It is withheld from your paycheck by your employer and is not recoverable at tax time through the OBBBA provision.
Federal income tax and FICA are administered under separate statutory frameworks. Income tax is governed by the Internal Revenue Code Title 26, Subtitle A — and the OBBBA amended subtitle A provisions. FICA is governed by Title 26, Subtitle C — a different chapter entirely. A deduction for income tax purposes does not automatically carry through to FICA purposes. Congress would need to pass a separate statutory exemption to exclude overtime from FICA — and the OBBBA did not do this.
Workers with wages above $200,000 (single) or $250,000 (MFJ) also owe the 0.9% Additional Medicare Tax. The Additional Medicare Tax is based on wages, so the OBBBA deduction does not change it. For most hourly overtime workers well below $200,000 in wages, the Additional Medicare Tax is not relevant.
For a single worker in the 22% federal bracket paid time-and-a-half, every $3 of overtime pay contains $1 of deductible premium. On $18,000 of overtime pay:
Only the premium portion is shielded from federal income tax; the base-rate portion of every overtime hour is taxed exactly as before. 'No tax on overtime' is accurate only for a narrow reading of federal income tax on the premium portion.
Not all overtime is created equal under the OBBBA. The deduction is tied specifically to overtime pay that qualifies under the Fair Labor Standards Act (FLSA) — which excludes significant categories of workers and some types of overtime arrangements.
The following workers generally qualify for the OBBBA overtime deduction:
FLSA 'exempt' employees are those classified as executive, administrative, professional, computer, or outside sales employees meeting both a salary basis test (paid a fixed salary not subject to reduction) and a duties test. Exempt employees are not entitled to FLSA overtime — by definition, they do not receive time-and-a-half for hours over 40. Because there is no FLSA overtime pay, there is nothing for the OBBBA deduction to apply to. Examples of commonly exempt roles: salaried managers, lawyers, accountants, engineers, software developers above the computer employee salary threshold, and most salaried professionals earning above the FLSA exemption salary level ($684/week as of 2026 — check DOL for any updates).
Independent contractors are not employees under FLSA. FLSA overtime protections apply to employees — the employer-employee relationship triggers both the overtime obligation and the potential for OBBBA-deductible overtime pay. A 1099 contractor who works 60 hours in a week and charges a premium rate for those extra hours is not earning 'FLSA overtime' — they are billing for services rendered. The OBBBA deduction does not apply. Additionally, 1099 contractors already face self-employment tax (15.3% combined Social Security and Medicare on net earnings, compared to the 7.65% employee share for W-2 workers) — the OBBBA provides no relief here either.
Some states — California being the most prominent — mandate overtime pay on a daily basis (over 8 hours in a day, even if weekly hours are under 40). This California daily overtime is a state law obligation, not a federal FLSA obligation. Whether California daily overtime pay qualifies for the OBBBA federal deduction depends on whether the hours also exceed 40 in the week (triggering FLSA overtime) or are purely a state-law premium with no federal analogue. If a California worker works 10 hours on Monday but only 35 hours total that week, the Monday overtime premium is California-law overtime only — it does not meet the FLSA 40-hours-per-week threshold and likely does not qualify for the OBBBA deduction. IRS guidance on this intersection has not been fully published. Consult a California tax professional if daily overtime is a significant component of your earnings.
As noted in the calculation section, only the premium portion of FLSA overtime pay (the amount above the regular rate) is deductible. An FLSA worker earning $30/hour overtime (regular rate $20, premium $10) can count only the $10 premium per overtime hour toward the $12,500 cap — it takes 1,250 overtime hours in a year at $10 of premium each to reach the cap. The IRS OBBBA newsroom pages (linked in sources below) provide the most current official guidance.
The OBBBA overtime deduction has two built-in expiration mechanisms that every worker should understand before adjusting their financial planning around the provision.
The deduction is not available to all earners at its full cap. It phases out above:
The reduction is $100 for each $1,000 of MAGI above the threshold (10 cents per dollar), so the deduction is gradual, not a cliff. It is fully gone at $275,000 (single) or $550,000 (joint). This means:
Note that these thresholds include all income — wages, investment income, rental income, business income, and any other sources. A worker earning $130,000 in wages who also has $25,000 in rental income has AGI of $155,000 (MAGI adds back certain excluded foreign income), reducing the maximum overtime deduction by $500 even though their wage income alone would have qualified in full.
For the typical hourly overtime worker — a nurse at $85,000, a truck driver at $70,000, a police officer at $90,000, a construction worker at $75,000 — the phase-out is irrelevant. These workers fall well below the $150,000 single threshold even after significant overtime. The phase-out primarily affects high-earning salaried workers who have been reclassified from exempt to non-exempt (and thus receive FLSA overtime), dual-income households with significant combined income, or workers with substantial investment or rental income on top of high wage earnings.
The OBBBA overtime deduction is temporary legislation. The provision applies to tax years beginning after December 31, 2024, and expires for tax years beginning after December 31, 2028. In practical terms:
This 4-year window is real money — up to $2,750 per year for a worker in the 22% bracket who reaches the single cap is up to $11,000 in total federal income tax savings over four years. But the sunset means that workers who are making career decisions (moving from exempt to non-exempt roles, increasing overtime hours) purely for the OBBBA benefit should factor in the finite timeline.
If Congress does not act before December 31, 2028, overtime pay reverts to being fully taxable at ordinary income tax rates — the same treatment as all other wages. There is no automatic extension mechanism in the OBBBA text. Advocacy for extension would need to pass Congress separately. The political landscape in 2028 will determine whether the deduction becomes permanent, is extended temporarily, or expires as written.
Beyond the phase-out and sunset, state income tax treatment is a practical third limit on the deduction's real-world benefit. States with no income tax (Texas, Florida, Nevada, Washington, Wyoming, South Dakota, Alaska, Tennessee for wages) provide maximum benefit — workers keep the full federal saving with no state layer. States that do not conform — notably California and New York — impose state income tax on all overtime with no OBBBA deduction. For the full state conformity picture, see the companion guide: No Tax on Overtime: Which States Conform 2026.
The OBBBA overtime provision has generated more misunderstanding than almost any recent US tax change. Here are the four most common misconceptions, corrected.
Reality: The deduction removes federal income tax on up to $12,500 of overtime premium for single filers — but FICA (7.65%) still applies to every dollar of overtime, and state income tax applies in states that don't conform. A single worker in the 22% bracket earning $18,000 in overtime pay at time-and-a-half deducts a $6,000 premium (saving $1,320 of federal income tax), still pays federal income tax on the other $12,000 of overtime pay, and owes $1,377 in FICA on all $18,000. Overtime is not tax-free.
Reality: $12,500 is the maximum deduction, not the maximum tax saving. The saving equals the deduction multiplied by your marginal rate. At 22%, $12,500 × 22% = $2,750 saved. At 12%, only $1,500 saved. Workers in lower brackets save less from the same deduction. And workers whose overtime premium is less than $12,500 can deduct only the premium they actually earned — for pay at time-and-a-half, one third of their overtime pay — not the full cap.
Reality: Only FLSA-qualifying overtime qualifies. Exempt salaried employees — who make up a large share of white-collar workers — do not receive FLSA overtime and cannot claim the deduction. Independent contractors (1099 workers) are not FLSA employees and are excluded. California daily overtime (over 8 hours per day, under 40 per week) may not qualify federally even though it is legally required overtime under California law.
Reality: The OBBBA overtime deduction is temporary, expiring December 31, 2028. It is not a permanent change to the tax code. Workers making long-term financial or career decisions based on the deduction should plan for the possibility that it does not continue beyond 2028.
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