No Tax on Overtime: What Qualifies in 2026?

The deduction applies to certain overtime compensation required by FLSA section 7 and paid above your regular rate. For a typical covered, nonexempt hourly employee, the federal rule requires time and a half after 40 hours worked in a workweek. The qualifying part is the extra half, not all the wages earned during those hours.

The label on a pay statement is not enough by itself. A line called overtime can include pay required only by a company policy, a union agreement, or state law. The federal deduction follows the portion needed to meet the FLSA requirement.

Think of ordinary time-and-a-half pay as two pieces: your regular hourly amount and an additional half of that amount. Only the required premium is the starting point for this deduction. The examples below keep those pieces visible so you can compare them with payroll records.

Double time changes the amount your employer pays, but the typical federal minimum remains time and a half. In that situation, the extra amount beyond the federal minimum is not qualified compensation. Dividing all double-time wages by two would therefore overstate the qualifying amount.

The FLSA regular rate reflects compensation that must be included under wage law, subject to specific exclusions. Certain nondiscretionary bonuses can increase it. Your base hourly wage and your FLSA regular rate can therefore be different even when the overtime hours are correct.

For a simple estimate, one unchanged hourly rate is useful. For payroll with bonuses, multiple rates, or other adjustments, ask for the employer's regular-rate calculation. Do not add every bonus yourself or assume every extra payment is excluded; the treatment depends on the payment.

Under the usual federal weekly rule, working a Saturday, Sunday, or holiday does not alone create FLSA overtime. Nor does a company promising a premium after a shorter workday automatically make the entire premium deductible. Some payments can be credited toward an FLSA obligation, so the employer must identify the amount required under federal law.

Certain health care, public safety, and government employees use alternative FLSA calculations. Federal employees may also be covered by OPM rules. Those cases should use the applicable payroll method and reported qualified amount rather than forcing the hours into the standard weekly formula.

The provision applies to tax years 2025 through 2028. The maximum annual deduction is $12,500 per eligible non-joint return or $25,000 on a joint return. The joint limit applies to the return as a whole, whether one spouse or both spouses receive qualified compensation.

An income phaseout reduces the deduction when MAGI exceeds $150,000 for a non-joint return or $300,000 for a joint return. The IRS worksheet applies that reduction after the annual cap. You can claim an eligible deduction while taking the standard deduction or while itemizing.

Beginning with tax year 2026, employers separately report qualified overtime on Form W-2, box 12, code TT. This is the qualified amount paid, before your individual deduction limits. A code TT figure can exceed the amount you are allowed to deduct.

If the reported amount is missing or understated, request a Form W-2c from your employer. Current IRS guidance does not allow an employee to substitute a larger hours-based estimate for a missing or understated 2026 code TT amount. If the amount is overstated, you may consider only the actual qualified compensation paid.

For tax year 2025, employers were not required to show the amount separately. IRS transition guidance permits specified reasonable methods using supporting pay records when a qualified amount was not provided. Keep that exception tied to 2025; it is not the reporting rule for later years.

After identifying qualified compensation, check filing eligibility, apply the cap and phaseout, and estimate the tax effect. Keep your pay records, W-2, and any corrected statements together so the amount can be traced back to payroll.

The deduction reduces taxable income; it does not promise a dollar-for-dollar refund. Social Security and Medicare generally still apply to overtime wages. Use the calculator for a federal estimate, and use the applicable tax-year forms to prepare your return.