No Tax on Overtime Calculator

Is Overtime Pay Really Tax-Free Now?

Quick answer: No. Overtime pay is not tax-free. The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, created a federal income-tax deduction for tax years 2025 through 2028 that covers only the half-time premium portion of Fair Labor Standards Act (FLSA) required overtime. Your overtime wages are still subject to federal income tax on the non-deducted portion, and the full amount remains subject to Social Security and Medicare taxes.

The confusion is understandable because the provision is widely nicknamed "no tax on overtime." In reality, it works like this: when you earn time-and-a-half, your paycheck contains two parts — your regular hourly rate for those hours, plus an extra half-time premium. Only that extra half, the amount by which your overtime pay exceeds your regular rate, can be deducted from your federal taxable income. The base pay for those hours is taxed exactly as before.

Three more facts keep the picture honest. First, the deduction is capped at $12,500 per return each year, or $25,000 for a joint return — overtime premiums above that level produce no additional deduction. Second, the deduction phases out for higher earners: it shrinks once modified adjusted gross income (MAGI) passes $150,000 for single filers or $300,000 for joint filers, and disappears entirely at $275,000 single or $550,000 joint. Third, married couples who file separately cannot claim it at all, and every claimant needs a valid Social Security number that is valid for employment.

For example, consider a single filer with MAGI of $80,000 who earned $9,000 of total time-and-a-half overtime pay and sits in the 22% federal bracket. The qualified premium is $9,000 divided by 3, which equals $3,000. That is below the $12,500 cap, and MAGI is below the $150,000 phaseout threshold, so the full $3,000 is allowed. The federal tax saving is $3,000 times 22%, or $660 in extra take-home pay compared with a world without the deduction.

2026 Key Figures at a Glance

The table below summarizes every number that controls the overtime deduction for 2026. These are the exact constants this calculator uses, drawn from IRS guidance including Notice 2025-69 and the 2026 inflation adjustments in Revenue Procedure 2025-32.

Keep in mind that the deduction reduces only federal income tax. It does not reduce the Social Security tax of 6.2% (up to the $184,500 wage base for 2026), the Medicare tax of 1.45% on all wages, or any state income tax. Your employer will continue withholding FICA from every overtime dollar.

How the Calculator Works

Quick answer: The calculator divides your total time-and-a-half overtime pay by 3 to isolate the deductible half-time premium, applies the $12,500 or $25,000 annual cap, subtracts 10% of any MAGI above the $150,000 or $300,000 threshold, and multiplies the allowed deduction by your marginal federal tax rate to get your estimated saving.

Step 1: isolate the qualified premium. Time-and-a-half pay equals 1.5 times your regular rate, which is your regular rate (1.0) plus a half-time premium (0.5). Only the 0.5 portion qualifies, and 0.5 divided by 1.5 equals one-third. That is why the rule is simple: total time-and-a-half overtime pay divided by 3 equals the qualified premium. This matches the IRS fallback method in Notice 2025-69 and the Schedule 1-A instructions. If your employer separately reported the qualified premium on your W-2 or statement, enter that figure instead and the calculator uses it directly.

Step 2: apply the annual cap. The calculator takes the smaller of your qualified premium and the statutory cap — $12,500 for single and head-of-household filers, $25,000 for joint returns. Premiums above the cap generate no extra deduction, which matters most for workers with very large overtime totals.

Step 3: apply the phaseout. If your MAGI is at or below $150,000 single or $300,000 joint, there is no reduction. Above the threshold, the calculator subtracts 10% of the excess MAGI from the capped deduction, floored at zero. The arithmetic means the deduction reaches zero exactly at $275,000 single or $550,000 joint: at those points 10% of the $125,000 or $250,000 excess equals the full cap. Married taxpayers who file separately are flagged as ineligible and receive a $0 result with a warning.

Step 4: convert the deduction to dollars saved. A deduction is not a credit — it saves you your marginal tax rate times the allowed amount. The calculator multiplies the allowed deduction by your marginal federal rate, either auto-suggested from the 2026 brackets or entered manually, to produce your estimated federal tax saving, which equals your take-home pay increase versus the no-deduction baseline.

Calculator Inputs and Outputs Explained

Each input has a specific job. Total time-and-a-half overtime pay is the gross overtime amount at the 1.5 rate, found in W-2 Box 14 for 2026, on an employer statement, or by adding up overtime lines on your pay stubs. Employer-reported qualified premium is optional: if your employer already isolated the half-time portion, entering it overrides the divide-by-3 estimate and is more precise. Filing status selects the cap and phaseout thresholds; choosing married filing separately triggers the ineligibility warning because the law bars the deduction for that status. MAGI drives the phaseout test — use your modified adjusted gross income, not gross wages. Marginal rate can be auto-suggested from the 2026 federal brackets based on your income or set manually if you already know your bracket.

The outputs tell the full story in order. The qualified premium is the deductible base before any limits. The capped deduction shows what survives the annual cap. The phaseout reduction shows how much high income clawed back. The allowed deduction is the final amount that reduces your taxable income. The tax saving is the allowed deduction times your marginal rate, and the take-home delta equals that saving — the extra dollars in your pocket versus a baseline with no overtime deduction. All calculations run entirely in your browser and your data never leaves your device.

2025 vs 2026 Reporting: W-2 Box 14 and Notice 2025-69

Reporting rules differ between the two years, and this is where many workers get confused. For tax year 2025, the IRS granted transition relief in Notice 2025-62: employers were not required to separately report qualified overtime on Forms W-2, 1099-NEC, or 1099-MISC, though they could do so voluntarily in Box 14. Workers whose employers did not provide a separate figure must reconstruct the premium themselves, generally by dividing total time-and-a-half overtime pay by three, following Notice 2025-69 and the Schedule 1-A instructions.

Starting with tax year 2026, separate reporting becomes mandatory: employers must report qualified overtime compensation on the W-2, 1099-NEC, or 1099-MISC (or another specified statement). That makes the 2026 calculation straightforward — read the employer-reported premium, apply caps and phaseouts, and claim the deduction as an additional deduction reported with the new Schedule 1-A. Whether you itemize or take the standard deduction ($16,100 single, $32,200 joint, $24,150 head of household for 2026) makes no difference to eligibility.

Worked Examples

Example 1 — single filer, full deduction. A single filer has MAGI of $80,000 and earned $9,000 of total time-and-a-half overtime pay, placing them in the 22% bracket. Qualified premium: $9,000 divided by 3 equals $3,000. Capped deduction: the smaller of $3,000 and $12,500, which is $3,000. MAGI of $80,000 is below the $150,000 threshold, so the reduction is $0 and the allowed deduction is $3,000. Tax saving: $3,000 times 22% equals $660, meaning take-home pay rises by $660 versus the no-deduction baseline.

Example 2 — single filer in phaseout. A single filer has MAGI of $160,000 and a capped deduction of $12,500. Excess MAGI is $160,000 minus $150,000, or $10,000. Reduction is 10% of $10,000, or $1,000, leaving an allowed deduction of $11,500. At MAGI of $200,000 the excess is $50,000, the reduction is $5,000, and the allowed deduction is $7,500. At MAGI of $275,000 the reduction reaches $12,500 and the allowed deduction is $0.

Example 3 — joint filers in phaseout. Joint filers with MAGI of $400,000 and a capped deduction of $25,000 have excess MAGI of $100,000 over the $300,000 threshold. The reduction is 10% of $100,000, or $10,000, leaving an allowed deduction of $15,000. In the 24% bracket that saves $3,600 of federal income tax. At MAGI of $550,000 joint, the $25,000 reduction wipes out the deduction completely.

Why Overtime Looks "Taxed More" on Your Paycheck

Overtime is not taxed at a higher rate — federal brackets apply to total annual income regardless of source. The illusion comes from withholding: payroll systems often withhold supplemental or irregular overtime amounts at flat or annualized rates that overstate the true liability, so an overtime-heavy paycheck can look heavily taxed. At filing time the actual brackets reconcile everything, and any excess withholding comes back as a refund. Use our paycheck calculator to compare withholding scenarios and our hourly paycheck calculator if you are paid by the hour.