Understanding the Overtime Pay Tax Deduction
It’s pretty interesting that overtime pay is not taxed in the same way, but what does that really mean for you?
The recent tax cut doesn’t completely remove taxes on overtime pay, but if you qualify, it could put a little more money in your pocket.
The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, introduced several new tax cuts, one being the overtime deduction.
This credit is temporary—it applies to tax years 2025 through 2028, impacting approximately 143 million people. Taxpayers can deduct a part of their salary that exceeds their normal pay. If you happen to have extra time, you can deduct up to half. Just to be clear, not all of your overtime earnings are deductible; only those that go beyond your regular rate will qualify, and there are limits involved.
For example, the maximum tax-free deduction for overtime is $12,500, while for joint filers, it’s $25,000, gradually phasing out starting at income levels of $150,000 for singles and $300,000 for married couples.
Under the Fair Labor Standards Act (FLSA), you’re entitled to at least the minimum wage for each hour worked, plus 1.5 times the wage for any hours over 40 per week—though there are some exceptions to this.
Figuring out your eligibility can be somewhat tricky, as there are various factors to consider. Some information from the Department of Labor might help clarify things.
The tax credits can apply whether you choose to itemize your deductions or take the standard deduction. However, once your income hits $275,000 for single filers or $550,000 for joint filers, that deduction goes away.
To apply for this deduction, you’ll need your Social Security number. If you’re married, be prepared to file jointly to claim it.
Generally, hourly workers and other non-exempt employees can deduct overtime pay, but many office workers might not qualify. Even if you meet federal deduction criteria, state laws and other payroll taxes may still apply.
Before claiming the deduction, determine how much overtime you’ve actually worked.
Employers aren’t required to track overtime separately in the 2025 tax year, but they might still need to do so. Overtime can appear on various forms, like Form W-2 or Form 1099.
Because documentation methods vary, the IRS allows taxpayers to estimate their overtime pay using whatever records they have at least through 2025.
Say you earned $15,000 in total overtime; your eligible amount might be around $5,000. Just divide $15,000 by 3, and voilà, you get one and a half times for half the hours worked.
If your overtime pay is higher, for example, $20,000, calculate it similarly to profile your eligible portion.
For the 2026 tax year, employers must report the total of qualified overtime earned on either Form W-2 or Form 1099, so 2025 feels a bit like a transition phase.
Just a heads-up, claiming these overtime deductions isn’t automatic. You have to fill out Schedule 1-A on Form 1040. When itemizing taxes, this schedule gets added to Schedule A.
Completing Schedule 1-A will need some basic math skills, and since it’s a two-page form, be sure to focus on the relevant parts.
The rules surrounding the One Big Beautiful Bill Act (OBBBA) offer various insights into tax credits—especially concerning overtime pay credits, which remain available until 2028.
Yes, you definitely need to attach Schedule 1-A to Form 1040 when you file.
