OBBBA Overtime Tax Exemption: Keep More of Your Time-and-a-Half Pay in 2026
The OBBBA overtime exemption lets eligible workers deduct up to $12,500 (or $25,000 if married) in overtime wages from federal income tax through 2028. Here is who qualifies and how much you can save.
Working overtime already costs you time. Under the old tax code, it also cost you a disproportionate share of that extra pay. The One Big Beautiful Bill Act changed that. From the 2025 tax year through 2028, eligible workers can deduct a portion of their FLSA overtime wages from federal taxable income — reducing the tax hit on every extra hour worked.
What the OBBBA Overtime Deduction Is
The deduction applies to overtime pay earned under the Fair Labor Standards Act — specifically, the premium pay for hours worked above 40 in a workweek. It is an above-the-line deduction, meaning it reduces your adjusted gross income before you apply the standard deduction or itemize. You do not need to itemize to benefit.
The Caps: $12,500 for Single Filers, $25,000 for Married Couples
The deduction ceiling depends on your filing status. Single filers and heads of household can deduct up to $12,500 in overtime pay per year. Married couples filing jointly can deduct up to $25,000. These caps apply to your total overtime income across all employers — not per job.
Example: A single warehouse associate earning $55,000 in regular wages works heavy overtime and receives $9,000 in overtime premium pay. That $9,000 falls under the $12,500 cap, so all of it is deductible. At the 22% federal marginal rate, the savings are $1,980 for the year.
For married couples where both spouses earn overtime, the combined $25,000 cap can generate $3,000 to $5,500 in federal tax savings depending on their marginal rate. This is one of the most impactful provisions in the bill for dual-income households.
Run the numbers for your exact situation using the OBBBA Tax Calculator — it factors in your wages, overtime, filing status, and state conformity.
Who Qualifies for the Overtime Deduction
The deduction applies to overtime paid under the FLSA — meaning W-2 employees classified as non-exempt who receive time-and-a-half (or greater) for hours worked over 40 in a workweek. If your pay stub shows an overtime line item and you receive a W-2, you almost certainly qualify.
Who does not qualify: salaried employees classified as FLSA-exempt (executives, licensed professionals, certain administrative workers above the salary threshold), and independent contractors. The 1099 overtime equivalent — higher pay for more hours — is not FLSA overtime and is not eligible for this deduction.
Phase-Out: Higher Earners See a Smaller Deduction
Like the tip deduction, the overtime deduction phases out for higher earners. The phase-out begins at $150,000 in modified AGI for single filers and heads of household ($300,000 for married filing jointly) and reduces the available deduction by 6 cents for every dollar above the threshold. For most overtime workers — who tend to earn moderate wages — the phase-out is irrelevant.
Stacking Tips and Overtime: A Major Benefit for Restaurant and Hospitality Workers
If you earn both tips and overtime — common in restaurants, hotels, and event venues — you can claim both deductions simultaneously. The $25,000 tip cap and the $12,500 overtime cap apply independently of each other, not as a combined limit. A single filer who earns $20,000 in tips and $8,000 in overtime can deduct the full $28,000.
For a worker in the 22% bracket, that combined deduction represents over $6,100 in annual federal tax savings — the equivalent of more than two weeks of additional take-home pay.
See how tips and overtime stack for your numbers → Calculate My Savings
FICA Still Applies to Overtime Pay
The OBBBA overtime deduction reduces your federal income tax only. Social Security (6.2%) and Medicare (1.45%) continue to apply to all overtime wages. The deduction does not eliminate payroll taxes — it eliminates or reduces the income tax layer on your overtime premium.
State Conformity Varies
Whether your state exempts overtime income follows its own legislation, not federal law. Several states have conformed; many have not. Check the state conformity tracker for an up-to-date list of where your state stands.
Frequently Asked Questions
Does the deduction apply to bonus pay or holiday pay?
No. The deduction applies specifically to FLSA overtime — the premium paid for hours above 40 per workweek. Discretionary bonuses, holiday pay, and shift differentials are not FLSA overtime and are not eligible for this deduction.
Can part-time workers who occasionally exceed 40 hours in a week benefit?
Yes. The deduction applies to any non-exempt employee who works more than 40 hours in a workweek and receives the FLSA premium, regardless of their full-time or part-time classification. What matters is hours in a given workweek, not your employment status.
Is there a minimum amount of overtime I need to earn?
No floor exists. Even $500 in overtime pay qualifies for the deduction — and generates real savings at any marginal rate. The $12,500 and $25,000 figures are ceilings, not minimums.
When does the OBBBA overtime deduction expire?
The deduction is currently set to sunset after the 2028 tax year. Congress must act to renew or make it permanent. For now, the deduction applies to tax years 2025 through 2028.
Disclaimer: This article is for general informational purposes only and does not constitute tax, legal, or financial advice. Tax rules are complex and individual circumstances vary. Consult a qualified tax professional for advice specific to your situation.