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The overtime deduction for 2025–2028 is often called "no tax on overtime." In reality, only one slice of your overtime pay counts. Here's which slice, how to find it on your pay stubs, and why double time doesn't double the deduction.
To run your own numbers, use the Tips & Overtime Deduction Calculator. It converts total overtime pay into the qualified premium for you.
What does "qualified overtime compensation" mean?
IRC §225 defines qualified overtime compensation as overtime pay required by section 7 of the Fair Labor Standards Act (FLSA) that is in excess of your regular rate. In plain English:
- The FLSA generally requires non-exempt employees to be paid at least 1.5 times their regular rate for hours over 40 in a workweek.
- Of that 1.5x, the "1" is your normal pay for the hour. The "0.5" is the premium.
- Only the 0.5 premium is qualified overtime.
So if you earn $24 an hour and work an overtime hour at $36, the qualified overtime for that hour is $12.
What doesn't count as qualified overtime?
IRS Notice 2025-69 and the statute exclude several kinds of "overtime" that show up on pay stubs:
| Type of pay | Qualified? | Why |
|---|---|---|
| FLSA premium (the extra 0.5x for hours over 40) | Yes | Required by FLSA section 7 |
| Regular pay for overtime hours (the "1" in 1.5x) | No | It's your regular rate, not a premium |
| Extra premium above 1.5x (for example, the second 0.5x of double time) | No | Paid by employer choice, not required by the FLSA |
| Overtime required only by state law (for example, daily overtime) | No | Not required by FLSA section 7 |
| Overtime under a union contract or company policy beyond the FLSA | No | Not required by FLSA section 7 |
| Weekend or holiday premiums not tied to FLSA overtime | No | Not required by FLSA section 7 |
| Overtime-style pay to FLSA-exempt (usually salaried) employees | No | Exempt employees have no FLSA overtime |
| Qualified tips | No | The statute excludes them from overtime |
There are special FLSA rules for some jobs. Examples include public-sector firefighters and police (29 U.S.C. 207(k)), hospital and residential care workers on 8-and-80 schedules (207(j)) and public employees who receive compensatory time (207(o)). Notice 2025-69 says these workers should compute overtime under the rules that actually apply to them.
How do you find the premium on your pay stub?
For tax year 2025, most W-2s don't show qualified overtime separately. Notice 2025-62 gave employers penalty relief for 2025, and some employers voluntarily shared the amount in W-2 box 14 or on a separate statement. If yours did, use that number.
If not, Notice 2025-69 gives you reasonable methods based on what your records show:
| What your year-end pay records show | Method from Notice 2025-69 | Worked example |
|---|---|---|
| (A) The FLSA premium, shown separately | Use it | $5,000 premium → $5,000 |
| (B) Total overtime pay at 1.5x (premium + regular pay for hours over 40) | Divide by 3 | $15,000 → $5,000 |
| (C) The amount above your regular rate, paid at 2x | Multiply by 1/2 | $10,000 → $5,000 |
| (D) Total overtime pay at 2x (premium + regular pay for hours over 40) | Divide by 4 | $20,000 → $5,000 |
The worked examples come straight from Notice 2025-69's own examples.
Why divide by 3? At time-and-a-half, each overtime hour pays 1.5 units. The premium is 0.5 of those units, and 0.5 ÷ 1.5 = 1/3.
Why divide by 4 for double time? Each double-time hour pays 2 units, but only 0.5 is the FLSA premium. 0.5 ÷ 2 = 1/4. The employer's extra generosity doesn't increase the deduction.
The notice adds two more options:
- (E) Adjustments. If a method would underestimate your premium, you may adjust for it. For example, a nondiscretionary bonus can raise your regular rate.
- (F) No full-year statement. If you have no statement that covers the whole year, you may use a reasonable method based on your regular rate and your hours over 40. Asking your employer for the numbers counts as a reasonable method.
If you had more than one employer in 2025, you may use a different method for each one. Keep copies of every document you rely on.
What changes for tax year 2026?
For 2026 and later, employers must report qualified overtime on the W-2 in box 12 with code TT. Payors use box 1d on Form 1099-NEC and box 14 on Form 1099-MISC. Once you have a 2026 W-2 with a code TT amount, you generally won't need the divide-by-3 math. The Notice 2025-69 methods are written for tax year 2025.
How big is the deduction in practice?
The premium is capped at $12,500 per return ($25,000 on a joint return). Above $150,000 of MAGI ($300,000 joint), the cap is reduced by $100 for each full $1,000 over the threshold.
Three illustrations, run through our calculator for tax year 2026 (standard deduction, no credits, MAGI treated as wages):
| Worker | Overtime on records | Qualified premium | Estimated federal tax saved |
|---|---|---|---|
| Single warehouse worker, $62,000 MAGI | $9,000 total at 1.5x | $3,000 | About $360 |
| Head of household, $55,000 MAGI | $15,000 total at 1.5x | $5,000 | About $600 |
| Married couple, $140,000 MAGI | $20,000 total at 2x | $5,000 | About $1,100 |
These are illustrations, not predictions. Your saving depends on your bracket and the rest of your return. Also remember that Social Security and Medicare tax still apply to all of your overtime pay.
Am I "non-exempt" under the FLSA?
FLSA status depends on your job duties, how you're paid and how much you earn. Many hourly workers are non-exempt. Notice 2025-69 says that if you aren't sure, you should make a reasonable effort to find out, which may include asking your employer.
If you're self-employed, you don't have FLSA overtime from your own business.
When is it worth getting help?
It may be worth a professional review if you work under a special FLSA schedule (public safety, hospitals), had several employers, got a nondiscretionary bonus that changes your regular rate, or your records don't show overtime clearly. RAHA's Tax Return with Tips & Overtime Deductions is a fixed-price service, quoted upfront. Ask about it here, or read about our tax filing services.
For the full picture, including tips and phase-outs, see No Tax on Tips and Overtime (2025–2028): Complete Guide. Employers should read Tips and Overtime Reporting: What Employers Need to Know.
Frequently asked questions
Is my whole overtime paycheck deductible?
No. Only the FLSA-required premium above your regular rate is qualified overtime. For time-and-a-half, that's one-third of your total overtime pay.
I'm paid double time. Do I get to deduct half of it?
No. The FLSA only requires time-and-a-half, so only the 0.5x premium counts. If your records show total double-time pay, Notice 2025-69 says to divide by 4.
Does California-style daily overtime count?
Overtime required only by state law, and not by FLSA section 7, is not qualified overtime.
I'm salaried but my company pays me for extra hours. Does that qualify?
If you are FLSA-exempt, those payments are not qualified overtime, regardless of state law or company policy.
What if my employer didn't give me a separate overtime figure for 2025?
Use one of the Notice 2025-69 reasonable methods based on your pay stubs, or ask your employer. Keep the documents you rely on.
Does the overtime deduction reduce my Social Security and Medicare tax?
No. Overtime remains subject to payroll taxes. The deduction affects federal income tax only.
Sources
- IRC §225, qualified overtime compensation: https://www.law.cornell.edu/uscode/text/26/225
- IRS Notice 2025-69 (section III methods A–G and examples): https://www.irs.gov/pub/irs-drop/n-25-69.pdf
- IRS Notice 2025-62 (2025 information-reporting penalty relief): https://www.irs.gov/pub/irs-drop/n-25-62.pdf
- 2025 Schedule 1-A (Form 1040): https://www.irs.gov/pub/irs-pdf/f1040s1a.pdf
- IRS Publication 15 (2026): https://www.irs.gov/pub/irs-pdf/p15.pdf
This guide provides general information for educational purposes and is not tax, legal or accounting advice. Consult a qualified professional before acting.