If you’ve been putting in extra hours at work, here’s some good news: a new federal tax deduction for overtime pay could reduce your taxable income.

The One Big Beautiful Bill Act (OBBBA) gave overtime workers a tax break, but as with any new tax legislation, the rules matter. First, the overtime deduction applies only to tax years 2025 through 2028, so it’s a temporary tax break (unless Congress decides to extend it in the future).

Let’s walk through what this deduction is, who qualifies, and how to calculate and claim it without getting lost in tax jargon.

What Is the Qualified Overtime Deduction?

Under the OBBBA, eligible workers can deduct the overtime premium portion of their pay on their federal income tax return. The deduction is capped at $12,500 ($25,000 for married couples filing jointly).

Lawmakers have dubbed this “no tax on overtime,” but that’s not exactly true. You can’t deduct your entire overtime check, only the extra amount you receive above your normal hourly rate.

For example, say you normally earn $20 per hour and overtime pays $30 per hour (time-and-a-half). Only the extra $10 per hour is deductible.

The deduction doesn’t apply to non-standard overtime compensation under a collective bargaining agreement, state law, or another arrangement. In some cases, your overtime might be paid at a rate higher than time-and-a-half, based on something other than a standard 40-hour workweek, or converted to comp time.

In that case, any overtime pay exceeding the Fair Labor Standards Act (FLSA)-required overtime premium isn’t deductible.

In short, the new deduction might reduce the tax burden on the extra hours you work, but it doesn’t eliminate taxes on all overtime wages. Plus, overtime pay is still subject to payroll taxes and state and local taxes may apply as well, depending on where you live.

The deduction is retroactive to January 1, 2025, so all overtime earned in 2025 counts.

Who Qualifies?

Most hourly employees who receive overtime pay under federal labor laws qualify. If you earn time-and-a-half (or higher) under standard overtime rules, you’re likely in the pool.

However, there are some income limits.

The deduction starts phasing out once your modified adjusted gross income (MAGI) exceeds $150,000 ($300,000 for married couples filing jointly). Once your MAGI exceeds $275,000 ($550,000 for joint filers), the deduction disappears.

Other important rules to keep in mind include:

• You can’t deduct overtime if you’re married but file separately from your spouse
• You must have a valid Social Security number
• You can deduct overtime whether you claim the standard deduction or itemize

For many workers, the MAGI limits won’t be an issue. But if your income is approaching those levels, you may be able to take advantage of tax planning strategies to reduce taxable income and maximize the deduction.

How to Calculate the Overtime Deduction

This is where people get tripped up, so let’s break it down.

Say your regular hourly rate is $20, so your overtime rate is $30. So your overtime premium is $10 per hour. If you worked 100 hours of overtime during 2025, your potential deduction would be:

100 hours x $10 per hour = $1,000

And remember, this is a tax deduction, not a tax credit, which reduces your tax bill dollar-for-dollar. Tax deductions lower your taxable income, so their value depends on your tax bracket. Assuming you’re in the 22% tax bracket, a $1,000 deduction lowers your tax bill by roughly $220.

How to Claim the Overtime Deduction

You claim the overtime deduction in Part III of Schedule 1-A, attached to your Form 1040. This form is also used for other new deductions under the OBBBA, including the deduction for tip income, car loan interest, and the enhanced deduction for seniors.

Where Can You Find Overtime Pay on Your W-2?

Here’s where things get interesting. Beginning with 2026 W-2 forms (issued in early 2027), employers will be required to report overtime separately. That should make claiming the deduction easy for workers.

But for 2025 W-2s, reporting isn’t universal.

Because Congress passed the OBBBA mid-year, some employers and payroll processing companies weren’t set up to report overtime wages separately. Even the IRS wasn’t prepared, and it announced in IR-2025-82 that it wouldn’t update the 2025 Form W-2 or withholding tables for the new law.

While the IRS encourages employers and payers to voluntarily provide qualified overtime information to employees, there’s no penalty for not doing so.

If your employer does report overtime compensation on your W-2, you’ll find it in Box 14. Otherwise, you may be able to get the information via an online portal, a separate written statement from your employer, pay stubs, payroll reports, or other records that show overtime hours and rates.

If you’re not sure whether your records are sufficient, it’s a good idea to work with a tax professional instead of guessing.

Watch for Federal vs. State Differences

It’s important to note that the new overtime deduction applies at the federal level. Not all states automatically conform to federal tax law changes. That means, depending on where you live, your overtime premium might be deductible on your federal return and fully taxable on your state return.

We verify state-level conformity when we prepare returns. If you’re filing on your own, make sure your tax software handles this properly or you could accidentally underreport state income.

Make Those Extra Hours Count at Tax Time

If you’ve been working overtime to improve your financial situation, the new qualified overtime deduction allows you to keep more of what you earn, but only if you qualify and claim it properly.

If you have questions about whether you qualify, how much you can deduct, or how this affects your state filing, contact NewWay Accounting. We’ll walk through it with you, make sure you have the right documentation to support the deduction, and help you take full advantage of what the law allows.