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.
By Sharon Ben-Moshe · Last reviewed June 21, 2026
Quick answer
The OBBBA overtime deduction covers only the overtime premium — the extra 0.5× pay that takes your rate from 1× to 1.5× — not your total overtime paycheck. The annual cap is $12,500 for single filers and heads of household, and $25,000 for married filing jointly. Only overtime required under the Fair Labor Standards Act (FLSA) qualifies, so FLSA-exempt salaried workers do not. The same $150,000/$300,000 MAGI phase-out applies at 6%, and FICA taxes still apply to all overtime pay. The deduction is scheduled to sunset after tax year 2028.
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
How to find your overtime premium
The quickest way: take the total overtime dollars on your pay stubs for the year and divide by 3, because the premium (0.5×) is one-third of time-and-a-half pay (1.5×). So if your stubs show $9,000 of overtime pay, roughly $3,000 is the deductible premium. Our calculator does this for you — you can enter either your premium directly or estimate it from your hours and regular rate.
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: the deduction reduces by 6 cents per dollar once MAGI exceeds $150,000 (single) or $300,000 (married filing jointly).
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. Salaried employees classified as FLSA-exempt (most managers and professionals) do not qualify even if they work long hours, because their overtime is not FLSA-required. See our occupation-specific guides for the details that apply to your exact job.
Likely qualifies
- Hourly factory & warehouse workers
- Construction and trades workers
- Non-exempt healthcare staff (many nurses, aides)
- Retail and logistics hourly staff paid 1.5×
Does not qualify
- FLSA-exempt salaried managers & professionals
- The regular 1× portion of overtime pay
- Premium above the annual cap
- "Extra" pay not required by the FLSA
FICA still applies
Like tips, FICA taxes (Social Security 6.2% and Medicare 1.45%) still apply to all overtime pay, including the premium. The OBBBA only reduces federal income tax on the overtime premium portion — your FICA withholding does not change, and those contributions still count toward your Social Security record.
Common mistakes to avoid
- Deducting your entire overtime paycheck instead of just the premium (0.5×).
- Assuming exempt salaried overtime qualifies — it does not.
- Forgetting FICA still applies to all overtime.
- Skipping the W-4 update and over-withholding all year.
- Overlooking state tax, which most states still charge on overtime.
How to claim it and update your W-4
Like the tip deduction, the overtime premium deduction is above-the-line. Update your W-4 Line 4b with your estimated annual premium deduction to stop over-withholding now — the W-4 adjustment guide walks through it, and most states still tax overtime, so check the State Conformity Tracker.
Source: IRS guidance on the OBBBA overtime deduction and FLSA overtime rules. Estimates only; not tax advice. Last reviewed June 21, 2026.