The 2025 tax law created a brand-new deduction for overtime workers — but the name promises more than the fine print delivers. Here’s what “no tax on overtime” really means, and the one math detail almost everyone gets wrong.
Only the premium qualifies — not the whole overtime paycheck
This is the single most misunderstood point. The deduction covers only the extra half of time-and-a-half pay — the premium above your regular rate — not the full overtime amount.
Concrete example: you earn $20 an hour, so overtime pays $30. Work 10 overtime hours and your overtime earnings are $300. But the qualified, deductible amount is only the $10-an-hour premium: $100, not $300. Another way to think about it: exactly one-third of time-and-a-half pay is the premium.
Filers who deduct the full overtime figure will overstate the deduction — and that’s the fastest route to an IRS notice.
The basics of the deduction
- Available for tax years 2025 through 2028.
- Caps the deduction at $12,500 per filer ($25,000 for joint returns).
- Applies only to overtime compensation required by the FLSA — the federal “over 40 hours” premium. State-only daily overtime that isn’t federally required doesn’t count.
- Phases out at higher income levels, and married-filing-separately returns are excluded.
- Your employer is expected to report qualified overtime on your W-2, but keeping your own records from paystubs is smart insurance.
Why this matters before you file
Because only the premium counts, most workers’ actual deduction is far smaller than their total overtime earnings suggest. Someone earning $8,000 in overtime pay at time-and-a-half has roughly $2,667 of qualified premium — meaningful, but a third of what the headline implies.
Estimate your real number first
Before tax season, run your hours through a no-tax-on-overtime calculator to isolate the qualified premium from your total overtime pay. Walking into filing season knowing your true deductible amount — instead of guessing from a gross figure — is the difference between claiming the break correctly and claiming it wrong.