How to Calculate Your No Tax on Overtime Deduction (Only the Premium Counts)

Here's the part most people get wrong: the OBBBA overtime deduction doesn't cover your whole overtime paycheck. It covers only the premium — the extra 'half' in time-and-a-half. If you normally earn $30 an hour and get $45 for overtime, only the $15 premium is deductible, not the full $45. For 2025 through 2028, you can deduct up to $12,500 of that premium ($25,000 if you're married filing jointly).

What 'qualified overtime' means

Qualified overtime compensation is the part of your overtime pay that exceeds your regular hourly rate and is required under the federal Fair Labor Standards Act (FLSA). In time-and-a-half, your regular rate is the 'one' and the premium is the 'half.' Only the half qualifies for the deduction (IRS, OBBBA tax deductions).

The logic is simple. The FLSA already forces employers to pay 1.5× for hours over 40 in a workweek. Congress chose to make that mandatory premium — the half — deductible, while the base rate you'd have earned on any hour stays taxable.

The calculation in three steps

To find your deduction, separate the premium from the base:

1. Find your regular hourly rate — say $30/hour.
2. Find your overtime rate — at time-and-a-half, that's $45/hour.
3. Subtract: $45 − $30 = $15. That $15 per overtime hour is your qualified premium. Multiply it by your overtime hours for the year.

If you worked 200 overtime hours at that rate, your premium is $15 × 200 = $3,000. That $3,000 is what you deduct — not the $9,000 of total overtime pay you received.

A worked example

Consider Devin, a single warehouse worker. His regular rate is $28/hour, his overtime rate is $42/hour, and he logged 300 overtime hours in 2026. His premium per hour is $42 − $28 = $14. Across 300 hours, that's $4,200 in qualified overtime — comfortably under the $12,500 cap, so he deducts the full $4,200 from his federal taxable income.

Now raise his hours. If Devin pulled enough overtime that his premium topped $12,500 — roughly 893 overtime hours at that $14 premium — he'd hit the cap and deduct $12,500, with the rest non-deductible. Filing jointly, the cap doubles to $25,000.

Rather than do this by hand, let the calculator split the premium and apply the cap for you → Tips & Overtime Calculator.

What doesn't qualify

Only FLSA-required overtime counts. Several common forms of extra pay are excluded:

• The base portion of your overtime pay — the regular rate you'd earn on any hour
• Overtime required only by a state law or union contract that's more generous than the FLSA
• Voluntary shift premiums, weekend or holiday differentials, on-call pay, and standby pay
• Discretionary bonuses that aren't tied to FLSA overtime

If your employer pays double-time, only the portion that represents the FLSA-required premium is qualified, so check how your pay stub breaks it out.

How it shows up on your W-2

For 2025, many payroll systems couldn't separate the premium yet, so the IRS issued transition relief (Notice 2025-69) letting you calculate the qualified amount from your own pay stubs and records. Starting with 2026 wages, employers report qualified overtime on the W-2 in Box 12 with code 'TT' — so hang on to your final 2025 pay stub if you're claiming the deduction for that year.

Already know your premium? See your whole OBBBA picture — tips, overtime, and federal savings together — with the calculator, or read the full breakdown in our OBBBA Overtime Tax Exemption guide.

Frequently asked questions

Is all of my overtime pay tax-deductible?

No. Only the premium — the 'half' in time-and-a-half — is deductible. The base hourly portion of overtime pay remains fully taxable, and FICA taxes still apply to the entire amount.

How many overtime hours can I deduct?

There's no hour limit, but there's a dollar cap. You can deduct qualified premium pay up to $12,500 (single) or $25,000 (married filing jointly) per year, no matter how many hours produced it.

Does the overtime deduction remove Social Security and Medicare tax?

No. Like the tip deduction, it only reduces federal income tax. Your full overtime pay, premium included, still has the 7.65% FICA tax withheld.

What if my state requires overtime the FLSA doesn't?

Overtime mandated only by a more generous state rule isn't 'qualified overtime' for the federal deduction — only the FLSA-required premium qualifies. Your state may or may not offer its own break; see our state conformity guide.

Can I claim it if I'm a salaried employee?

Only if you're actually entitled to FLSA overtime. Many salaried workers are exempt and receive no overtime premium at all. If you're non-exempt and paid time-and-a-half for hours over 40, the premium qualifies.

This article is for general educational purposes and reflects federal guidance available as of June 2026. It is not tax advice. Overtime rules vary by job and employer — consult a qualified tax professional about your situation.