Overtime pay is now deductible from federal income tax under the One Big Beautiful Bill. Single filers can deduct up to $12,500, married filers up to $25,000. The benefit phases out at higher incomes and expires in 2028.
Starting in 2026, overtime pay can be deducted from your federal taxable income under the One Big Beautiful Bill. The deduction is capped at $12,500 for single filers and $25,000 for married filing jointly. The benefit phases out for single filers earning above $150,000 MAGI ($300,000 married) and expires after 2028. Overtime is still subject to Social Security, Medicare, and state income taxes.
Overtime deduction capped at $12,500 (single) / $25,000 (married). Phases out above $150k/$300k income. Expires 2028. FICA and state taxes still apply.
| 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, overtime pay is deductible from federal taxable income starting in 2026. Single filers can deduct up to $12,500, married filers up to $25,000. The deduction phases out for higher earners and expires after 2028. You still pay Social Security and Medicare on all overtime, and your state may still tax overtime income.
Single filers can deduct up to $12,500 in overtime pay from federal taxable income. Married filing jointly filers can deduct up to $25,000. If you earn more overtime than the cap, only the cap amount is deductible. The deduction also phases out for single filers with income above $150,000 and fully phases out at $275,000 ($300,000–$550,000 for married filers).
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.