Millions of workers who earn overtime may be able to reduce their federal income taxes under a new deduction for qualified overtime pay. The IRS has released guidance explaining how the deduction works, who can claim it, and how workers should calculate the amount they can deduct. The deduction applies to tax years beginning after 2024 and ending before 2029.
The new rules are part of changes made under the One Big Beautiful Bill Act. While the law is often described as creating “no tax on overtime,” workers still pay Social Security and Medicare taxes on overtime pay. The benefit is a federal income-tax deduction, not a complete exemption from all taxes.
How the Overtime Tax Break Works
Eligible workers can deduct up to $12,500 of qualified overtime pay from their federal taxable income. Married couples who file a joint tax return can deduct up to $25,000.
However, the deduction does not cover every dollar of overtime pay. Generally, only the extra portion required under federal overtime rules qualifies. For example, when a worker earns time-and-a-half, the additional half of the regular hourly wage generally counts as qualified overtime.
Workers will still include their overtime earnings as income. The deduction is then used to reduce the amount of income subject to federal income tax.
Not Everyone Will Get the Full Deduction
The amount workers can claim depends partly on their income. For 2026, the deduction begins to decrease when modified adjusted gross income goes above $150,000 for single filers and $300,000 for married couples filing jointly. Higher-income taxpayers may receive a smaller deduction or may not qualify for the full benefit.
This means workers should not assume that they can automatically deduct the maximum amount simply because they worked overtime.
What Counts as Qualified Overtime?
The IRS has specific rules for determining which overtime earnings qualify. Generally, qualified overtime is the additional amount an employer must pay under the Fair Labor Standards Act when a covered, nonexempt employee works more than 40 hours in a workweek.
For example, if a worker normally earns $20 per hour, federal overtime rules generally require at least $30 per hour for qualifying overtime hours. The additional $10 per hour is generally the portion that can qualify for the deduction.
Extra payments such as double-time pay or certain holiday and weekend premiums may not qualify.
Workers May See More Money in Their Paychecks
The tax change may also affect workers during the year rather than only when they file their tax returns. The IRS says employers can use an updated Form W-4 and federal withholding procedures to allow employees to account for the expected deduction. This could result in more money in some workers’ paychecks instead of waiting until they file their tax return to receive the full benefit.
Workers should still keep their pay records and check their tax documents carefully. The amount of qualified overtime may not always appear separately on a W-2, especially for earlier tax years.
What This Means for Overtime Workers
The new deduction could provide tax savings for people who regularly work overtime, but it does not mean their overtime income is completely tax-free. Qualified overtime is still generally subject to Social Security and Medicare taxes, and workers must meet the IRS requirements to claim the deduction.
For workers who qualify, the deduction can lower their federal income-tax bill. The amount of savings will depend on how much qualified overtime they earned, their income, filing status, and other factors on their tax return.
As taxpayers prepare for the 2026 tax year, understanding these rules can help overtime workers keep better records and make sure they claim the deduction correctly.
