“No Tax on Overtime” – Qualified Overtime Compensation Deduction | 1040.com®

Article: 50648

Overview

You may be eligible to take a federal income tax deduction for qualified overtime compensation (the “no tax on overtime” provision of the new tax bill). This is a deduction from federal taxable income for a portion of your qualified overtime compensation.

The “No Tax on Overtime” rule does not make overtime pay completely tax-free. It is a federal income tax deduction for certain qualified overtime compensation that you can claim (if eligible) when you file your tax return.

The deduction: 

• appears on Schedule 1-A – Additional Deductions and is claimed on Form 1040 as a deduction that reduces federal taxable income.
• is up to $12,500 (single) or $25,000 (married filing jointly).
• can be claimed by both itemizing and non-itemizing taxpayers..
• is not available for taxpayers who file Married Filing Separately (MFS).
• is subject to a Modified Adjusted Gross Income (MAGI) phase-out starting at $150,000 ($300,000 MFJ). The deduction may be reduced or eliminated for higher-income taxpayers.

How to Report

1. Go to the Review tab on the left side of the screen.
2. Under the Federal Taxes section, click I’d like to see the forms I’ve filled out or search for a form.
3. In the search box, type Additional Deductions – No Tax on Overtime.
4. Alternatively, click the General tab and locate the form there.
5. Select Additional Deductions – No Tax on Overtime to add and open the form.
6. Enter the applicable overtime information.
7. Click Save to apply the deduction.

Notes

• Only the premium portion of overtime pay qualifies
   (generally the extra 0.5 paid above the employee’s regular hourly rate for time-and-a-half).
• Regular wages and the base portion of overtime pay do not qualify.
• The deduction applies only to federal income tax.
   Overtime wages remain subject to Social Security, Medicare, and state taxes where applicable.
• This deduction is available for tax years 2025 through 2028, unless extended by future legislation.

Frequently Asked Questions

• Is overtime pay completely tax-free?
  No. This provision creates a deduction for federal income tax purposes only. Payroll taxes still apply.
• Will my employer stop withholding tax on overtime pay?
  No. Employers generally withhold taxes as usual. The deduction is claimed when you file your return.
• Does this apply to all overtime pay?
  No. Only overtime that meets the definition of qualified overtime compensation may be deducted.
• Is there an income limit?
  Yes. The deduction phases out for higher-income taxpayers and may be reduced or eliminated based on your income.

Related Links

• Notice 2025-69 
• Schedule 1 Instructions
• IRS Newsroom – One Big Beautiful Bill Act (Overtime and Tips Provisions)

This new tax bill was signed into law on July 4, 2025. The One Big Beautiful Bill Act (OBBB or OB3) is now also being referred to by lawmakers as the Working Families Tax Cut Act. You may see one or both names used, but they refer to the same set of tax changes.