Overtime pay is now exempt from federal income tax. See exactly how much more you take home on every overtime check — no dollar cap.
Starting in 2026, all overtime pay — hours worked beyond 40 per week at 1.5x your regular rate — is exempt from federal income tax under the One Big Beautiful Bill. Unlike the tip exemption ($25,000 cap), there is no dollar limit on the overtime exemption. Overtime is still subject to Social Security and Medicare taxes, and state income taxes may still apply.
Overtime exempt from federal income tax under the One Big Beautiful Bill. FICA taxes still apply. State taxes vary.
| Regular Pay (this check) | $0.00 |
| Overtime Pay (this check) | $0.00 |
| Gross Pay (this check) | $0.00 |
| Federal Income Tax (regular pay only) | −$0.00 |
| Overtime Federal Exemption | $0.00 ✓ |
| State Income Tax | −$0.00 |
| Social Security (6.2% — OT included) | −$0.00 |
| Medicare (1.45% — OT included) | −$0.00 |
| Net Take-Home Pay | $0.00 |
Yes — under the One Big Beautiful Bill, all overtime pay is exempt from federal income tax starting in 2026. There is no dollar cap on the overtime exemption, unlike the tip exemption which is capped at $25,000 per year. You still pay Social Security and Medicare on overtime, and your state may still tax overtime income.
All of it — there is no limit on the federal overtime exemption. Whether you earn $5,000 or $50,000 in overtime pay during the year, it is all exempt from federal income tax. This makes the overtime exemption significantly more valuable than the tip exemption for high overtime earners.
Overtime is generally defined as hours worked beyond 40 in a workweek, paid at a rate of at least 1.5x your regular hourly rate (time and a half). The IRS is expected to issue formal guidance on the exact definition for tax purposes. Double time and other premium pay rates also qualify.
Generally no — the overtime exemption applies to hourly workers who earn overtime pay. Most salaried employees are classified as exempt under the Fair Labor Standards Act and don't receive overtime pay, so the exemption wouldn't apply to them. Some salaried non-exempt workers may qualify.
Most states have not adopted an overtime exemption. Only states with no income tax (Texas, Florida, Nevada, etc.) effectively have no state tax on overtime. California, New York, Illinois, and most other states still tax overtime at the normal state rate. Our calculator shows your state tax separately.
Yes. The overtime exemption applies only to federal income tax. Social Security (6.2% up to $184,500) and Medicare (1.45% on all wages) still apply to all overtime pay. These FICA taxes combined add up to 7.65% on your overtime earnings.
Employers should adjust withholding once IRS guidance is issued. If your employer hasn't updated payroll systems yet, you may have too much federal tax withheld and will receive a larger refund when you file your 2026 tax return. You can also adjust your W-4 to reduce withholding manually.
Yes — if you earn both tips and overtime, both exemptions apply simultaneously. Tips up to $25,000 and all overtime pay are each independently exempt from federal income tax. Use our Paycheck Calculator to calculate both together, or our No Tax on Tips Calculator for tip income specifically.