How the overtime deduction works
Only the premium part of your overtime pay is deductible — not your full time-and-a-half paycheck. If you earn time-and-a-half, the deductible amount is just the extra “half” above your regular rate. That amount is capped, and it shrinks if your household income is high enough to trigger the phase-out.
The formula
regularAnnualWages = hourlyWage × 40 × weeksWorkedPerYear totalOvertimePay = hourlyWage × 1.5 × overtimeHoursPerWeek × weeksWorkedPerYear qualifiedOvertimePremium = hourlyWage × 0.5 × overtimeHoursPerWeek × weeksWorkedPerYear MAGI = regularAnnualWages + totalOvertimePay + otherHouseholdIncome cap = $12,500 (single) or $25,000 (joint) phaseOutSteps = floor(max(0, MAGI − threshold) / $1,000) phaseOutReduction = phaseOutSteps × $100 deductibleAmount = max(0, min(qualifiedOvertimePremium, cap) − phaseOutReduction)
Worked example
A married couple filing jointly has $30,000 of qualified overtime premium for the year and a MAGI of $340,500.
- Cap: $25,000 (joint) — their $30,000 premium is capped down to $25,000.
- Excess MAGI: $340,500 − $300,000 = $40,500, which floors to 40 full $1,000 steps.
- Phase-out reduction: 40 × $100 = $4,000.
- Deductible amount: $25,000 − $4,000 = $21,000.
Frequently asked questions (FAQ)
What counts as "qualified overtime compensation"?
Only the premium portion of FLSA-required overtime pay — for standard time-and-a-half overtime, the extra "half," not the full 1.5× pay. The base regular-rate portion of overtime pay is taxed as ordinary wage income, same as before.
How much can I deduct?
Up to $12,500 if you file single, or $25,000 combined if you file jointly, per tax year. The cap applies to your total qualified overtime premium for the year, before any income-based phase-out.
Does my income affect how much I can deduct?
Yes. If your MAGI is above $150,000 (single) or $300,000 (joint), the deduction shrinks by $100 for every $1,000 over that threshold, reaching $0 at $275,000 (single) or $550,000 (joint).
Do I still owe payroll taxes on my overtime pay?
Yes. This is a federal income tax deduction only — Social Security and Medicare taxes still apply to your full overtime pay, and your state may still tax it depending on where you live.
Do I need to itemize to claim this deduction?
No. It is an above-the-line deduction, available whether you itemize or take the standard deduction. You do need a valid Social Security number to claim it.
How long is this deduction available?
It applies to tax years 2025 through 2028 under the One Big Beautiful Bill Act. Unless extended, it is scheduled to expire after the 2028 tax year.