Overtime

Per the Internal Revenue Service:

Effective for 2025 through 2028, individuals who receive qualified overtime compensation may deduct the pay that exceeds their regular rate of pay – such as the “half” portion of “time-and-a-half” compensation -- that is required by the Fair Labor Standards Act (FLSA) and that is reported on a Form W-2, Form 1099, or other specified statement furnished to the individual.

• Maximum annual deduction is $12,500 ($25,000 for joint filers).
• Deduction phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers).

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• An employee's regular hourly rate is $30.
• When working overtime, their rate is time-and-a-half, or $45 per hour ($30 x 1.5).
• The "no tax on overtime" deduction applies to the overtime premium, which is the "half" or the portion exceeding their regular pay, according to www.jems.com. In this case, that's $15 per hour ($45 - $30).
• If the employee works 10 hours of overtime in a week, the eligible overtime premium for the deduction would be $150 ($15 per hour x 10 hours).
• This means, that for the purposes of federal income tax, the employee can deduct that $150 from their taxable income when they file their annual tax return. 

• This is a deduction, not an exemption. Taxes will still be withheld from overtime paychecks, but the deduction can be claimed when filing annual tax returns.
• The deduction is temporary. It's currently in effect for tax years 2025 through 2028.
• There are income limits. The deduction phases out for those earning over $150,000 in modified adjusted gross income ($300,000 for joint filers).
• The deduction is capped. The maximum deduction is $12,500 for single filers and $25,000 for those married filing jointly.
• Only federal income tax is affected. This deduction does not apply to payroll taxes (Social Security and Medicare), or state and local income taxes.
• It applies only to FLSA-required overtime. Overtime premiums required by state laws or union contracts may not be eligible for this deduction.