What Counts as Qualified Overtime for the No Tax on Overtime Deduction
The overtime deduction (IRC § 225) does not cover all of your overtime pay. It covers only qualified overtime compensation: the part of overtime pay required by the Fair Labor Standards Act (FLSA) that is above your regular rate.
Example
You earn $20/hour and work 10 overtime hours at time-and-a-half ($30/hour). You're paid $300 for those hours. The qualified portion is the $10/hour premium × 10 hours = $100, not $300.
What usually does not count?
- The "straight time" part of overtime hours (your regular rate)
- Overtime premiums paid only because of a union contract, state law, or employer policy beyond what the FLSA requires (for example daily overtime over 8 hours, or double time) — the IRS says the deduction covers overtime "required by the FLSA"
- Pay for workers who are exempt from FLSA overtime (many salaried employees)
What are the limits?
Up to $12,500 per year ($25,000 on a joint return), reduced by $100 for every $1,000 of MAGI over $150,000 ($300,000 joint). Years 2025–2028. SSN required; married couples must file jointly.
State-law-only overtime and how employers compute the FLSA "regular rate" can be complicated. Check your employer's figure and IRS FAQ guidance if your pay includes bonuses or shift differentials.
Sources
- IRS Fact Sheet FS-2025-03: tax deductions for working Americans
- 26 U.S. Code § 224 – Qualified tips and § 225 – Qualified overtime compensation
- IRS FS-2026-13: overtime deduction Q&A
- Public Law 119-21 (congress.gov)
→ Estimate your deduction with the free calculator
More guides
- 7 Common Mistakes Claiming No Tax on Tips or Overtime
- How to Claim No Tax on Tips and Overtime on Your Return (Schedule 1-A)
- No Tax on Tips: Federal Rules Explained (2025–2028)
- No Tax on Overtime: How Much Will I Save? Real Examples
- No Tax on Tips & Overtime Phase-Out Explained (MAGI $150,000 / $300,000)
- No Tax on Tips for Self-Employed and Gig Workers
- Does No Tax on Tips Apply to State Taxes?
- Which Jobs Qualify for No Tax on Tips? Eligible Occupations
- W-2 Box 12 Codes TP and TT: Tips and Overtime Reporting