No Tax on Overtime — How the OBBBA Deduction Works
The OBBBA lets overtime workers deduct the overtime premiumportion of their pay — the extra 0.5× rate. Here's exactly what that means and how to calculate your deduction.
Key Concept: Premium Pay vs. Total OT Pay
You are deducting the overtime premium — the extra 0.5× portion — not your total overtime paycheck. When you work overtime, you earn 1.5× your regular rate. The regular 1× portion is regular wages (not deductible). Only the extra 0.5× portion is the OBBBA overtime deduction.
Example: Regular rate $20/hr, 100 OT hours worked
Total OT pay: 100 × $30 = $3,000
Regular portion: 100 × $20 = $2,000 (NOT deductible)
OT premium (deductible): 100 × $10 = $1,000
Deduction caps
The overtime premium deduction is capped at $12,500 per year for single filers and heads of household, and $25,000 for married filing jointly. The same income phase-out applies: deduction reduces if MAGI exceeds $150,000 single / $300,000 MFJ.
Who qualifies?
W-2 employees whose overtime is required under the Fair Labor Standards Act (FLSA) — non-exempt hourly workers and non-exempt salaried workers paid 1.5× for hours beyond 40 per week. Factory workers, construction workers, warehouse employees, and non-exempt healthcare workers commonly qualify. Salaried employees classified as FLSA-exempt (managers, most professionals) do not qualify even if they work overtime, because their overtime is not FLSA-required.
FICA still applies
Like tips, FICA taxes (Social Security and Medicare) still apply to all overtime pay. The OBBBA only reduces federal income tax on the overtime premium portion.