Whether you’ve picked up extra shifts to pad your income or covered for an out-of-office colleague, 100% of your overtime pay is usually taxable, just like your regular earnings. New tax legislation has changed that, and it could affect your take-home pay. Here’s what you need to know about the new “No Tax on Overtime” deduction.
What is No Tax on Overtime?
No Tax on Overtime is a provision that was included in a larger tax reform bill that passed in July 2025. It allows certain workers to deduct up to $12,500 in qualified overtime compensation from their taxable income on their federal income tax return. Joint filers can deduct up to $25,000.
Is there a tax on overtime?
Qualified overtime compensation (QOC) is now exempt from federal income taxes, up to $12,500 (single filers) and $25,000 (joint filers) dependent on your modified adjusted gross income (MAGI). You’ll still owe payroll tax (i.e., Social Security and Medicare taxes) and possibly state and local taxes.
What is the overtime tax rate?
There is no special tax rate on overtime pay. The portion that is taxable will be taxed at your regular income tax rate. Here is a snapshot of IRS tax brackets for 2025 and 2026:
2025 tax brackets
| Tax rate | Single filers | Married filing jointly | Head of household |
|---|---|---|---|
| 10% | $0 to $11,925 | $0 to $23,850 | $0 to $17,000 |
| 12% | $11,926 to $48,475 | $23,851 to $96,950 | $17,001 to $64,850 |
| 22% | $48,476 to $103,350 | $96,951 to $206,700 | $64,851 to $103,350 |
| 24% | $103,351 to $197,300 | $206,701 to $394,600 | $103,351 to $197,300 |
| 32% | $197,301 to $250,525 | $394,601 to $501,050 | $197,301 to $250,500 |
| 35% | $250,526 to $626,350 | $501,051 to $751,600 | $250,501 to $626,350 |
| 37% | over $626,350 | over $751,600 | over $626,350 |
Source: IRS
2026 tax brackets
| Tax rate | Single filers | Married filing jointly | Head of household |
|---|---|---|---|
| 10% | $0 to $12,400 | $0 to $24,800 | $0 to $17,700 |
| 12% | $12,401 to $50,400 | $24,801 to $100,800 | $17,701 to $67,450 |
| 22% | $50,401 to $105,700 | $100,801 to $211,400 | $67,451 to $105,700 |
| 24% | $105,701 to $201,775 | $211,401 to $403,550 | $105,701 to $201,750 |
| 32% | $201,776 to $256,225 | $403,551 to $512,450 | $201,751 to $256,200 |
| 35% | $256,226 to $640,600 | $512,451 to $768,700 | $256,201 to $640,600 |
| 37% | Over $640,600 | Over $768,700 | Over $640,600 |
Source: IRS
Did the No Tax on Overtime provision pass?
Yes, No Tax on Overtime was bundled into the sweeping tax act that became law on July 4, 2025. It also included a separate provision called “No Tax on Tips,” which allows certain taxpayers in eligible occupations to deduct up to $25,000 in voluntary tipped income from their federal tax return. Both provisions are in effect now.
How does No Tax on Overtime work?
Workers who receive qualified overtime compensation may deduct earnings that exceed their regular rate of pay. Overtime pay must be reported on income tax form W-2, 1099, or another statement provided by the employer. This deduction reduces the worker’s taxable income, so they pay less in taxes or could potentially qualify for a refund. Tips earned during overtime work cannot apply toward the No Tax on Overtime deduction, but they can count toward the No Tax on Tips deduction.
Who qualifies for No Tax on Overtime?
Many workers who log overtime hours qualify for No Tax on Overtime. Here are the types of workers who qualify for this new tax deduction:
Non-exempt employees
Workers must be non-exempt, meaning they’re eligible for overtime pay, and receive a W-2 or 1099. Non-exempt employees are often hourly workers, but the Department of Labor considers some salaried employees earning under $684 per week to be non-exempt as well.
Taxpayers with MAGI under $275,000 (or $550,000 for married couples)
The No Tax on Overtime deduction starts to phase out for single filers with a MAGI of $150,000 or higher ($300,000 for joint filers). The deduction is reduced by $100 for every $1,000 above those thresholds. Single filers whose MAGI is $275,000 or above—or $550,000 or higher for married couples filing jointly—are not eligible for any part of the No Tax on Overtime deduction.
Those filing individual, head of household, or joint returns
The deduction is not available to married couples who file separate tax returns. Married couples must file jointly to claim the No Tax on Overtime deduction.
Those earning qualified overtime pay
The deduction applies only to qualified overtime pay as defined by the Fair Labor Standards Act (FSLA)—in other words, time-and-a-half pay that’s earned after exceeding 40 hours of work in a given week.
When does No Tax on Overtime go into effect?
No Tax on Overtime retroactively took effect on January 1, 2025, and remains in effect through December 31, 2028. Congress could decide to extend it.
How to claim No Tax on Overtime
To claim the No Tax on Overtime deduction when you file your tax return, you could hire a tax preparer, hand over your tax forms, and let them handle the rest. Or you could use tax preparation software to guide you through the process. If you’re filing your taxes yourself, take the following steps:
1. Complete Schedule 1A Parts I and III
First, you’ll need to fill out Part I, where you list your MAGI. Next, you’ll need to fill out Part III of Schedule 1A, where information related to claiming the No Tax on Overtime deduction goes. Write in your QOC where requested. Your employer is required to calculate this number for you. For tax year 2025, there isn’t a specific space for employers to enter your QOC, but your employer might provide this number in box 14 (“Other”) on your W-2. For tax year 2026, your employer might provide your QOC number in box 12 of your W-2 with the code “TT.”
Follow the rest of the instructions for this section. Line 21 will be the amount you’re deducting from your taxable income for the No Tax on Overtime deduction. Keep in mind the maximum amount a single filer can claim is $12,500, even if you earned more than that in overtime.
If you’re claiming other deductions on Schedule 1A, such as No Tax on Tips, you’ll need to follow instructions for those sections too.
2. Total your deductions on Schedule 1A
Add up your deductions on this form and fill out the total in box 38. If you only claim No Tax on Overtime, you’d include the number from line 21 here.
3. Enter your Schedule 1A deductions on Form 1040
Look for line 13b on Form 1040. This is where you’ll include your total additional deductions.
4. Complete Form 1040
This is your main tax return form where you’ll list your taxable income, which will have all your deductions, such as the standard deduction, if you’re taking it, and No Tax on Overtime, subtracted from your income.
5. Attach Schedule 1A to Form 1040
The IRS wants to see your work.
6. Submit your tax return
Whether you file online or by mail, if you owe taxes, don’t forget to include payment.
Consider working with a tax professional if you have questions or need additional help.
Do you need to itemize to claim No Tax on Overtime?
You do not have to itemize deductions to claim the No Tax on Overtime deduction. You may take the standard deduction or itemize deductions in addition to the No Tax on Overtime deduction. Note that this deduction is “below the line,” meaning it will not reduce your AGI, which is used to determine eligibility for certain deductions and tax credits, as well as your ability to contribute to some retirement accounts like Roth IRAs.