"No tax on overtime" is an income tax deduction of up to $12,500 ($25,000 on a joint return) for the extra half of your time-and-a-half pay. It is not a tax-free paycheck: Social Security and Medicare taxes still apply. Starting with 2026, you can only claim it if your employer reports the amount on your Form W-2 in box 12 with code TT.
Key takeaways
- The deduction covers only the "half" in time-and-a-half, up to $12,500 per return ($25,000 if married filing jointly), and you can claim it without itemizing.
- It shrinks if your modified adjusted gross income is above $150,000 ($300,000 joint). Married couples must file jointly to claim it.
- For 2026 and later, the IRS says you can only deduct overtime shown on your W-2 in box 12, code TT. The 2025 relief does not continue.
- It does not remove overtime from Social Security, Medicare or federal income tax withholding. To lower withholding, update your 2026 Form W-4, step 4(b).
- Only overtime that the Fair Labor Standards Act requires counts. Pay above that, such as double time, and overtime for exempt workers do not qualify.
If you work overtime, you have probably heard that it is now “tax-free.” That is not quite right, and a new rule for 2026 could cost you the benefit if your paperwork is wrong. Here is what the deduction really does, who gets it, and what to check before the year ends.
The short version: Congress created a deduction for overtime pay in the One, Big, Beautiful Bill Act. A deduction lowers the income you are taxed on. It does not erase your overtime from your paycheck taxes.
How does the no tax on overtime deduction work?
It covers only the extra half of your time-and-a-half pay, not the whole overtime paycheck. The IRS calls this “qualified overtime compensation”: overtime pay required by the Fair Labor Standards Act (FLSA, the federal wage law) that is above your regular rate.
Say you earn $20 an hour and work 50 hours in a week. Your 10 overtime hours earn $30 each. Your regular $20 an hour is already part of your normal pay. Only the extra $10 an hour is deductible, which is $100 for the week.
The IRS gives a similar case for double time. If your employer pays two times your rate, only the portion the FLSA minimally requires (the “half”) counts. The rest does not.
What are the limits?
| Rule | What the IRS says |
|---|---|
| Maximum deduction | $12,500 per return ($25,000 on a joint return) |
| Income limit | Reduced if modified adjusted gross income is over $150,000 ($300,000 joint) |
| Itemizing | Not required |
| Married couples | Must file jointly to claim it |
| Social Security number | Must be valid for employment |
| Tax years | The IRS lists 2025 through 2028 |
“Modified adjusted gross income,” or MAGI, is roughly your income after certain adjustments. The form that figures your exact reduction is Schedule 1-A, so use its instructions if you are near the income limits.
What changed for 2026?
This is the part many workers miss. For 2025, the IRS gave relief because employers were not yet required to report overtime separately. Workers could use the methods described in IRS Notice 2025-69.
For 2026 and later, there is no relief. The IRS says employees can only deduct qualified overtime that their employer reported on a properly furnished Form W-2. Employers must now put the amount in box 12 with code TT. In the rare case where a worker counts as an employee under the FLSA but is treated as an independent contractor for tax purposes, the payer reports it on a Form 1099 instead.
Two details from the IRS are worth knowing:
- The amount in code TT can be bigger than your deduction. If your employer reports $30,000, you still deduct no more than $12,500 ($25,000 joint), minus any income-based reduction.
- If the amount is wrong, your employer must fix it with a corrected W-2 (Form W-2c). If they won’t, you can’t use the missing part.
What does it save you? An example
Illustration, not a prediction. Suppose you earn $25 an hour, work 10 overtime hours a week for 50 weeks, and your employer pays time-and-a-half.
- Overtime hours: 10 × 50 = 500 hours
- Extra half per hour: $25 × 0.5 = $12.50
- Qualified overtime: 500 × $12.50 = $6,250
- Total overtime pay you actually receive: 500 × $37.50 = $18,750
If your income is far below the limits, you deduct $6,250. If your top federal tax rate is 22%, that saves about $6,250 × 0.22 = $1,375 in income tax. Your Social Security and Medicare taxes are still figured on the full $18,750. Your own savings depend on your bracket, state and filing status.
Does it lower my paycheck withholding?
Not automatically. The IRS says employers must keep withholding income tax on overtime, and they can’t reduce it unless you give them a new Form W-4. The 2026 Form W-4 has a place for this in step 4(b). The IRS Tax Withholding Estimator can also account for it.
Many people just take the deduction when they file and get a bigger refund. Either way is allowed.
What about tips?
A separate deduction covers “qualified tips” in occupations on an IRS list, up to $25,000 a year, with the same $150,000 ($300,000 joint) income limit. You don’t have to itemize, and married couples must file jointly. Both deductions are claimed on Schedule 1-A.
What to do now
- Check your pay stubs. Add up your overtime hours and rate, and estimate the “half” portion.
- Ask payroll about code TT. Confirm your employer will report qualified overtime in box 12 on your 2026 W-2.
- Find out if you’re FLSA-eligible. Exempt salaried roles generally don’t qualify. The Department of Labor has guidance on who is covered.
- Decide on withholding. If you want the benefit in each paycheck, estimate it on a new W-4 (step 4(b)). Try the paycheck calculator to see your take-home.
- Run your numbers. Use the no tax on overtime calculator or the overtime calculator, and see current tax numbers for 2026.
- Keep records. Save year-end pay stubs. If your W-2 looks wrong when it arrives in January, ask for a W-2c right away.
This article is general information, not tax advice. Rules can change, so check the IRS overtime FAQ or a tax professional for your situation.
Frequently asked questions
Is overtime pay tax-free in 2026?
No. The law created an income tax deduction, not an exemption. The IRS says overtime pay is generally still subject to income tax withholding, Social Security tax and federal unemployment tax. The deduction lowers your taxable income when you file, up to $12,500 ($25,000 joint), and only for overtime the Fair Labor Standards Act requires.
What is code TT on my W-2?
Code TT in box 12 of Form W-2 is where your employer reports your qualified overtime pay, which is the extra half of time-and-a-half. The IRS says employers must report it separately starting in tax year 2026. The amount shown can be larger than the deduction you can take, because the $12,500 limit and income limits are applied on Schedule 1-A when you file.
Can I claim the deduction if my W-2 doesn't show it?
For tax years after 2025, generally no. The IRS says employees may not count qualified overtime above what is reported in box 12, code TT. If you think the amount is missing or too low, ask your employer for a corrected Form W-2c. Without that correction, you can't use the missing amount in your deduction.
Do salaried workers get the overtime deduction?
Only if they are eligible for overtime under the Fair Labor Standards Act. The IRS says someone who isn't eligible under that law gets no qualified overtime, even if a union contract or company policy pays overtime. Many salaried managers and professionals are exempt from FLSA overtime, so check with your employer or the Department of Labor.
How do I get the deduction in my paycheck instead of at tax time?
Your employer can't reduce income tax withholding for the deduction on its own. You can give them a new Form W-4 that estimates your expected deduction. The IRS says the 2026 Form W-4 lets you do this in step 4(b), and its Tax Withholding Estimator also accounts for it. Otherwise you get the benefit as part of your refund.
Do I need a Social Security number to claim it?
Yes. You need a Social Security number that is valid for employment and was issued before your return's due date, including extensions. If you are married, you and your spouse must file a joint return, and if both of you earned qualified overtime, both numbers must be on the return.