Is there tax on overtime? What the new law actually changes
The One Big Beautiful Bill Act created a federal tax deduction on overtime pay, but it doesn't make overtime tax-free. Here's how the deduction works, who qualifies, and what it means for your paycheck.
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Key takeaways
The OBBBA (signed July 4, 2025) allows eligible workers to deduct the "premium half" of FLSA overtime pay from their federal taxable income, up to $12,500 for single filers or $25,000 for joint filers.
The deduction covers the extra half of time-and-a-half pay, not your full overtime wages. Social Security and Medicare taxes (FICA) still apply to all overtime earnings.
It runs from tax years 2025 through 2028. Most states have not adopted the deduction, so your state income tax on overtime may remain unchanged.
How does the overtime tax deduction work?
Before the OBBBA, overtime pay was taxed exactly like regular wages. They were subject to federal income tax, state income tax, Social Security, and Medicare. That hasn't entirely changed, but the OBBBA introduced a new deduction that reduces the federal income tax on a portion of overtime earnings.
The deduction applies only to the "premium half" of time-and-a-half overtime pay required under the Fair Labor Standards Act (FLSA). If your regular hourly rate is $25 and your overtime rate is $37.50, the deductible portion is $12.50 per hour, which is the premium above your regular rate.
Here's what the deduction covers and what it doesn't:
| Covered by the deduction | Not covered |
Which wages | The FLSA premium (the extra 0.5× of your hourly rate for hours over 40/week) | Your base hourly rate during overtime hours |
Which taxes | Federal income tax only | Social Security (6.2%), Medicare (1.45%), state and local income taxes (in most states) |
Deduction cap | $12,500/year (single) or $25,000/year (joint filers) | Amounts above the cap are taxed normally |
Income phaseout | Begins at $150,000 MAGI ($300,000 joint) | Workers above the phaseout receive a reduced or no deduction |
Duration | Tax years 2025 through 2028 | Before 2025 and after 2028 (unless extended) |
The deduction is available whether or not you itemize. It reduces your taxable income before your tax is calculated, which lowers what you owe the IRS, but it does not eliminate taxes on overtime entirely.
What does the overtime tax deduction look like in practice?
The best way to understand the deduction is to see it applied to real numbers.
Example: a warehouse worker earning $24/hour
Say you work 50 hours per week (40 regular + 10 overtime). Your overtime rate under FLSA is $36/hour (time-and-a-half).
Regular weekly pay: 40 × $24 = $960
Overtime pay: 10 × $36 = $360
Overtime premium (the deductible portion): 10 × $12 = $120/week
Over a full year (52 weeks), that's $6,240 in deductible overtime premium.
If you're in the 22% federal tax bracket, the deduction saves you roughly $1,373 in federal income tax for the year. That's real money, but it's not the same as your overtime being "tax-free." You're still paying federal income tax on your base rate during overtime hours, plus FICA on all overtime earnings, plus state taxes in most states.
Example: a nurse earning $45/hour
Same structure: 50 hours/week, 10 hours of overtime at $67.50/hour.
Overtime premium: 10 × $22.50 = $225/week, or $11,700/year
At the 24% bracket, the deduction saves roughly $2,808 in federal income tax. But if the nurse's MAGI exceeds $150,000, the deduction begins to phase out, and nurses working significant overtime frequently cross that threshold.
Does your state conform to the overtime deduction?
The OBBBA is a federal provision, and each state decides independently whether to adopt it for state income tax purposes.
As of mid-2026, the landscape looks like this:
Nine states have no income tax (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming), so the question doesn't apply; overtime was already free of state income tax in these states.
Most states have not adopted the deduction. California, New York, Illinois, and New Jersey, among others, still tax overtime earnings at normal state rates. Colorado specifically decoupled from the overtime provision.
For workers in states that haven't conformed, the federal deduction still applies to your federal return, but your state tax bill on overtime remains unchanged. This is worth checking with your state's revenue department, as conformity decisions are still evolving.
Who qualifies for the overtime tax deduction?
Not everyone who works overtime qualifies. The deduction has specific eligibility rules:
You qualify if:
FLSA-eligible employee
- Your overtime pay is calculated under the FLSA (time-and-a-half for hours worked beyond 40 in a workweek)
Your MAGI is below $150,000 (single) or $300,000 (joint), or within the phaseout range
Your employer reports qualified overtime wages on your W-2
You do not qualify if:
Employees or gig workers that are not considered to be FLSA-eligible employees
You are a salaried exempt employee who doesn't receive FLSA overtime pay
Your overtime compensation is structured differently than time-and-a-half (e.g., double-time, flat bonus, comp time)
Your income exceeds the phaseout threshold entirely
It's also worth noting that your employer needs to accurately track and report your qualified overtime wages on your W-2 for you to claim the deduction. If your W-2 doesn't break out overtime pay, you may need to work with your employer or a tax professional to ensure it's reported correctly.
What should you do with the extra money?
The overtime deduction is temporary. It runs through 2028, and may or may not be extended. For workers who benefit, the extra take-home pay is an opportunity to strengthen your financial position while the deduction is available.
A few practical options:
Build or top up your emergency fund. A high-yield savings account earns a competitive rate while keeping your money accessible.
Pay down high-interest debt. Directing the savings toward credit card balances can save you more in interest than any savings account would earn.
Lock in a guaranteed rate. A CD can secure a fixed return on money you won't need for a set period.
Increase your retirement contributions. Even a small increase in your 401(k) contribution rate compounds significantly over time.
Bottom line
The OBBBA's overtime tax deduction is a real benefit for millions of W-2 workers, but it's more limited than the "no tax on overtime" headline suggests. It applies only to the premium half of FLSA overtime, only to federal income tax, and only up to a cap. Payroll taxes still apply, most states haven't adopted the deduction, and the provision expires after 2028.
For workers who qualify, the deduction can mean $1,000 to $3,000 or more in annual federal tax savings depending on income and overtime hours. The smartest move may be to direct those savings toward a financial goal while the deduction is still available.
If you're looking to grow your overtime earnings at a competitive rate, Raisin gives you access to high-yield savings accounts, CDs, and money market accounts across multiple federally insured banks and credit unions, all from a single account.
Frequently asked questions
Is overtime pay tax-free now?
No, overtime pay is not entirely tax-free. The OBBBA created a federal income tax deduction on the premium portion of FLSA overtime pay (the extra 0.5× of your hourly rate for hours over 40/week), capped at $12,500 for single filers or $25,000 for joint filers.
When does the overtime tax deduction start?
The deduction is already in effect. It applies to tax years 2025 through 2028, meaning eligible workers can claim it on their 2025 federal tax return (filed in 2026). Employer withholding may or may not have been adjusted mid-year, so some workers may see the benefit as a larger tax refund rather than a change in their paycheck.
Does my state offer the overtime tax deduction too?
It depends on your state. Nine states have no income tax, so the question doesn't apply. A handful of states with rolling conformity to federal taxable income (including Idaho, Iowa, Montana, North Dakota, Oregon, and South Carolina) automatically adopt the deduction.
Most other states, including California, New York, Illinois, and New Jersey, have not conformed and still tax overtime at normal state rates. Check with your state's revenue department for the most current status.
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