How to Calculate the Overtime Tax Deduction for 2025 (and 2026) — Step-by-Step

How to Calculate the Overtime Tax Deduction for 2025 — In Plain English

If you worked any FLSA overtime in 2025 or 2026, you are eligible for a brand-new federal "No Tax on Overtime" deduction worth up to $12,500 single / $25,000 joint per year. The catch: nobody at your job is going to calculate it for you. You claim it yourself on your Form 1040.

Here's the exact 4-step formula — the same one our free Overtime Pay Calculator uses — so you can do it in under 5 minutes for either tax year.

> Quick answer: Multiply your overtime hours × your regular hourly rate × 0.5 (the premium half of time-and-a-half). That dollar amount is your overtime tax deduction — capped at $12,500 (single) or $25,000 (joint).

The Formula (Memorize This)

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Overtime Tax Deduction = Overtime Hours × Regular Rate × 0.5

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That 0.5 multiplier is the single most important — and most misunderstood — number in this entire law. Many competing articles online tell readers to deduct their *full* overtime wages. You can't. The IRS only lets you deduct the premium portion (the extra half), because the base hourly rate would have been paid anyway at straight time.

Why 0.5 and not 1.5?

Time-and-a-half = 1.0× base pay + 0.5× premium. The federal deduction under Public Law 119-21 and IRS Notice 2025-69 only covers the 0.5× premium — the part of your check that exists *because* it was overtime.

Step-by-Step: Calculate Your 2025 / 2026 Overtime Deduction

Step 1 — Find your regular hourly rate

• Hourly worker: It's on your paystub.
• Salaried non-exempt: Annual salary ÷ 2,080 hours.
• Tipped or commission: Use your *regular rate* as defined by FLSA — base + non-discretionary bonuses ÷ hours worked.

Step 2 — Add up your overtime hours for the year

Pull your year-end paystub or W-2 wage statement. Only count hours paid at 1.5× under FLSA (more than 40 in a workweek). State-only daily overtime (California's 8-hour rule, Nevada's daily OT for low earners) does not qualify unless it also crossed 40 weekly hours.

Step 3 — Multiply: Hours × Rate × 0.5

That product is your qualifying overtime premium — the number you'll write on Form 1040.

Step 4 — Apply the cap and phase-out

| Filing Status | Maximum Deduction | Phase-Out Begins | Fully Phased Out |

|---|---|---|---|

| Single | $12,500 | $150,000 MAGI | $275,000 MAGI |

| Head of Household | $12,500 | $150,000 MAGI | $275,000 MAGI |

| Married Filing Jointly | $25,000 | $300,000 MAGI | $550,000 MAGI |

| Married Filing Separately | $0 (not eligible) | — | — |

Above the phase-in threshold, the deduction shrinks by $100 for every $1,000 of additional income. Above the upper threshold, it's zero.

Real Worker Examples

Example 1 — Warehouse worker, Texas

• Regular rate: $22/hour
• Overtime hours in 2025: 520 (an extra 10 hrs/week)
• MAGI: $58,000 (single)

Calculation:

• 520 × $22 × 0.5 = $5,720 deductible premium
• Below $150K phase-out → full deduction allowed
• At a 12% marginal bracket → ~$686 federal refund

Example 2 — Registered nurse, Ohio

• Regular rate: $42/hour
• Overtime hours in 2025: 350
• MAGI: $110,000 (married filing jointly)

Calculation:

• 350 × $42 × 0.5 = $7,350 deductible premium
• Below $300K phase-out → full deduction
• At a 22% bracket → ~$1,617 federal refund

Example 3 — Software engineer, California (high earner)

• Regular rate: $95/hour (non-exempt salary)
• Overtime hours in 2025: 180
• MAGI: $210,000 (single)

Calculation:

• 180 × $95 × 0.5 = $8,550 raw premium
• Phase-out: ($210,000 − $150,000) = $60,000 over threshold → reduce deduction by $60 × $100 = $6,000
• Allowed deduction = $8,550 − $6,000 = $2,550
• At 32% bracket → ~$816 refund

You can run any of these instantly in our No Tax on Overtime Calculator.

What's Different for the 2026 Tax Year?

The mechanics are identical for 2026 — same 0.5× formula, same caps, same phase-outs. Two things to track:

• . The deduction is adjusted for inflation starting 2026 — caps may rise slightly when the IRS releases the 2026 figures in late 2026.
• . Employers will report qualifying overtime separately on your 2026 W-2 (new IRS code), making it easier than 2025 (when most workers had to recompute from paystubs).

For state rules that interact with this deduction, see our State Overtime Law Guide 2026.

Where Most Online Calculators Get This Wrong

We reviewed the top results currently ranking for this question. Three recurring errors:

• . Deducting full overtime wages (1.5×). This will trigger an IRS adjustment notice. Only the 0.5× premium portion is deductible.
• . Ignoring the phase-out. Workers earning $200K+ who use a flat-cap calculator overstate their refund by thousands.
• . Counting state-only daily overtime. California's 8-hour daily rule and similar state premiums don't qualify unless they also exceed 40 weekly FLSA hours.

Our calculator handles all three correctly — the math is documented in our How It Works page.

How to Claim It on Your Tax Return

• . Total your qualifying overtime premium for the year (Steps 1–4 above).
• . On Form 1040, enter the amount on the "Qualified Overtime Compensation" deduction line (new for tax years 2025–2028, above-the-line).
• . Keep your year-end paystub or W-2 detail showing overtime hours and rate as backup.
• . If your employer issued a corrected W-2 with the new "qualified overtime" box (mostly 2026 forward), use that figure.

You do not need to itemize — this is an above-the-line deduction, available even if you take the standard deduction.

FAQ

Is overtime fully tax-free in 2025?

No. Only the premium half (0.5×) of FLSA overtime is federally deductible, up to $12,500/$25,000. Social Security, Medicare, and state income tax still apply to all of it.

Do I need to itemize to claim the overtime deduction?

No. It's an above-the-line deduction on Form 1040 — you can take it with the standard deduction.

Does double-time pay qualify?

Only the first 0.5× premium portion qualifies. The additional 0.5× that makes time-and-a-half into double-time is not federally deductible.

What if my employer didn't track overtime separately on my W-2?

For tax year 2025, recalculate from your year-end paystub: total OT hours × regular rate × 0.5. Keep the paystub as documentation. Starting 2026, the W-2 includes a dedicated qualifying-overtime box.

Can salaried employees claim this?

Only if you're non-exempt and were paid FLSA overtime. Exempt salaried employees (most managers, professionals over the FLSA salary threshold) don't earn qualifying overtime, so there's nothing to deduct.

Does the deduction reduce my Social Security and Medicare tax?

No — only federal income tax. FICA (7.65%) still applies to all overtime wages.

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Related Tools & Guides

• No Tax on Overtime Calculator — instant 2025/2026 estimate
• When Does No Tax on Overtime Start?
• How Bonuses Affect Overtime Pay
• FLSA Overtime Exemptions
• State Overtime Law Guide 2026

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*Sources: Public Law 119-21 (One Big Beautiful Bill Act, July 4, 2025); IRS Notice 2025-69; Fair Labor Standards Act §207; U.S. Department of Labor — Overtime. Last reviewed June 22, 2026.*

Run your own numbers

The overtime tax calculator applies the current brackets and FICA to your overtime so you can sanity-check the deduction math on your own pay stub.