No tax on overtime: deduct up to $12,500 in 2026.
The One Big Beautiful Bill Act lets eligible hourly workers deduct the premium half of overtime from federal income tax — for tax years 2025 through 2028. New York still taxes it in full. Here’s exactly how it works.
Premium ⅓ — deductibleBase pay ⅔ — still taxed
What “No Tax on Overtime” Actually Means
Signed July 4, 2025, Section 70202 of the One Big Beautiful Bill Act (new IRC §225) created a temporary federal income-tax deduction for overtime — not an exemption. Your paycheck doesn’t change; your tax return does.
From Extra Shift to Tax Break: 5 Steps
Follow the money — this is the exact path your overtime takes from the time clock to your tax return.
You work 40+ hours in a week
You must be a nonexempt employee under the Fair Labor Standards Act. Your employer is legally required to pay you at least 1.5× your regular rate for every hour past 40 in a single workweek.
Only the “half” counts
At $30/hour, overtime pays $45 — but only the $15 premium (the extra half) qualifies. The $30 base stays fully taxable, exactly like your regular wages.
Your employer reports it
For 2025 (transition year) reporting was optional — use your pay stubs. Starting with tax year 2026, employers must report your qualified overtime premium in W-2 Box 12, Code TT.
You claim it on Schedule 1-A
It’s an above-the-line deduction — you get it whether you itemize or take the standard deduction. Up to $12,500 single / $25,000 joint, subject to the income phaseout.
You keep the savings
The deduction cuts your federal taxable income dollar-for-dollar. At the 22% bracket, a $6,500 premium means $1,430 less federal tax — a bigger refund or a smaller bill.
Not the Full 1.5× — Just the Extra Half
This is the #1 misunderstanding. The IRS confirmed in Notice 2025-69: for time-and-a-half pay, your deductible amount is one-third of your total overtime pay.
Quick math
IRS-approved for 2025 when your W-2 doesn’t break out the premium. Paid double-time (2×)? Divide by 4. Triple-time (3×)? Divide by 6.
What You’d Actually Save
Four typical New York workers, 52 weeks of overtime. The deduction is capped at $12,500 single / $25,000 joint — high earners hit the ceiling fast.
| Worker | OT premium / year | Federal bracket | You save |
|---|---|---|---|
| $25/hr × 10 OT hrs/week | $6,500 | 22% | $1,430 |
| $35/hr × 8 OT hrs/week | $7,280 | 22% | $1,602 |
| RN · $42/hr × 12 OT hrs/week | $12,500 (capped) | 24% | $3,000 |
| Couple · $30/hr × 10 OT hrs/week each | $15,600 | 22% | $3,432 |
Want your own numbers? Run them through our NYC overtime pay calculator — then divide the premium by your bracket.
Federal vs. New York: The Split
Here’s what most articles bury: the federal deduction does not flow through to New York. Albany never conformed — your overtime stays fully taxable at the state and city level.
You get the break
- Deduct up to $12,500 / $25,000 of premium
- Above-the-line — works with standard deduction
- Claim on Schedule 1-A for 2025–2028
- Phaseout starts at $150K / $300K MAGI
No break at all
- NY State taxes 100% of your overtime
- NYC resident tax applies in full too
- Yonkers 16.75% surcharge applies too
- Exemption bill S3914-A never passed
And don’t forget FICA: Social Security (6.2%) and Medicare (1.45%) are still owed on every overtime dollar — the deduction only touches federal income tax. See how the layers stack on a $70K NYC paycheck.
Do You Qualify?
Two quick lists. If you’re in the left column, you’re in.
✓ You qualify if…
- W-2 employee, nonexempt under the FLSA
- Paid 1.5×+ for hours over 40/week
- Valid Social Security number
- MAGI under $150K single / $300K joint (partial above)
- Hourly, salaried-nonexempt, or tipped OT workers
✕ You don’t if…
- Exempt salaried (no FLSA overtime)
- 1099 contractor or gig worker
- File Married Filing Separately ($0 allowed)
- MAGI over $275K single / $550K joint (fully phased out)
- Overtime required only by state daily-OT rules
New York’s exempt salary thresholds for 2026 are $1,275/week in NYC and surrounding counties and $1,199.10/week elsewhere — earn less (and fail the duties test) and you’re nonexempt and covered.
How to Claim It
The paperwork depends on which tax year you’re filing.
Transition year: use pay stubs
Employers weren’t required to break out the premium (IRS Notice 2025-62). Add up your OT premium from pay stubs — or use the IRS-approved shortcut: total 1.5× OT pay ÷ 3. Keep every stub with your records.
Check W-2 Box 12, Code TT
Reporting becomes mandatory. Your employer must list your exact qualified overtime premium in Box 12 with Code TT. If the number looks wrong, reconcile it against your pay stubs before filing.
File Schedule 1-A
Enter the premium on the new Schedule 1-A as an above-the-line deduction. Tax software (TurboTax, H&R Block) prompts for it. Never enter total W-2 wages or full OT earnings — premium only.
See What Overtime Does to Your Paycheck
Plug in your hourly rate and overtime hours — our calculator breaks down your gross OT pay, the deductible premium, and your take-home in seconds.
Calculate My Overtime Pay →Overtime Tax Questions, Answered
Is overtime really tax-free now?
How much of my overtime can I deduct?
Does New York State give the same break?
I’m salaried. Do I qualify?
My 2025 W-2 doesn’t show overtime separately. What do I do?
Where will it appear on my W-2 going forward?
Can I claim it if I take the standard deduction?
What if I earn over $150,000?
Related Guides
Sources: One Big Beautiful Bill Act (P.L. 119-21) Sec. 70202 (new IRC §225); IRS Notices 2025-62 & 2025-69; NY Labor Law overtime thresholds 2026. General information only — not tax advice. Reviewed by Daniel Mitchell, U.S. Tax Consultant.