No Tax on Overtime: How to Claim the 2025 OT Deduction

Quick Answer: How Do I Calculate Overtime for the Tax Deduction?

Under the One Big Beautiful Bill Act (P.L. 119-21, Title VII), overtime pay earned in tax years 2025 to 2028 is eligible for a new above-the-line deduction. You can deduct the overtime portion of your W-2 wages (hours worked beyond 40 per week at 1.5× your regular rate) directly on your tax return.

Formula: (Total Hours Worked − 40) × 1.5 × Hourly Rate = Deductible Overtime Pay

The problem: most W-2s don't break out overtime separately. You need your own records (pay stubs, timesheets, or a time-tracking app) to prove the overtime portion of your income.

The Problem: Your W-2 Doesn't Show Overtime

If you work overtime, your overtime pay is now deductible, but there's a catch.

Form W-2, the document your employer sends you each January, reports your total wages in Box 1. It doesn't have a separate field for overtime pay. Your employer knows how much overtime you worked (they calculated the 1.5× rate on each paycheck), but that breakdown doesn't carry over to the W-2.

This means the burden falls on you. To claim the deduction, you need to figure out exactly how many overtime hours you worked during the tax year and how much overtime pay those hours generated.

A quick example of what's at stake

If you earned $22/hour and worked an average of 5 overtime hours per week for 48 weeks, that's 240 overtime hours at $33/hour, totaling $7,920 in overtime pay. The tax deduction on that amount could save you $950 to $1,750 in federal taxes depending on your bracket. But you only get that money back if you can document the overtime hours.

What records do you actually have?

Most workers are in one of three situations:

• You have a time-tracking app. If you've been clocking in and out with an app like Hours44, you already have a weekly breakdown of regular and overtime hours. Export the data and you're done.
• You have pay stubs. Many pay stubs list regular hours, overtime hours, and their respective pay amounts for each period. Collect all 26 (biweekly) or 52 (weekly) stubs and total the overtime figures.
• You have neither. If you don't have stubs or digital records, contact your employer's payroll department. Under federal law, employers must keep payroll records for at least three years. Request a detailed pay history that shows hours worked per week.

How to Calculate Your Overtime Hours

The federal overtime standard under the Fair Labor Standards Act (FLSA) defines overtime as hours worked beyond 40 in a single workweek. Here's the calculation.

Step 1: Gather your weekly hours

Pull together a record of hours worked for every week of the tax year. A "workweek" is any fixed, recurring 168-hour period (7 consecutive 24-hour days); it doesn't have to be Monday through Sunday.

Sources to check:

• Time-tracking app exports (Hours44 lets you calculate overtime directly)
• Pay stubs (look for "Regular Hours" and "OT Hours" columns)
• Employer timesheets or scheduling software printouts
• Payroll department records (request in writing)

Step 2: Identify overtime weeks

Go week by week. Any week where total hours exceed 40 contains overtime. Weeks at or under 40 hours contribute nothing to your deduction, even if one day was unusually long.

Important: overtime is calculated per workweek, not per day (except in California, which has daily overtime rules). You cannot average hours across two weeks.

Step 3: Calculate overtime hours per week

For each week with overtime:

Overtime Hours = Total Hours Worked That Week − 40

If you worked 47 hours, you have 7 overtime hours. If you worked 52 hours, you have 12.

Step 4: Sum all overtime hours for the year

Add up the overtime hours from every qualifying week across the entire tax year (January 1 through December 31, 2025). This is your total annual overtime hours.

Step 5: Calculate overtime pay

Multiply your total overtime hours by your overtime rate:

Overtime Pay = Total OT Hours × (Regular Hourly Rate × 1.5)

If your rate changed during the year (raises, job changes), calculate each period separately using the rate that applied at the time. The overtime tax savings calculator can handle multiple rates for you.

How to Claim the Overtime Deduction on Your Tax Return

Once you know your total overtime pay, you need to get it onto your federal return.

It's an above-the-line deduction

The overtime pay deduction is "above the line," meaning it reduces your adjusted gross income (AGI) before you decide whether to take the standard deduction or itemize. A lower AGI may also keep you eligible for other tax benefits: education credits, the Child Tax Credit, and IRA contribution deductions all have AGI-based phase-outs.

New schedule on Form 1040

The IRS is creating a new schedule for this deduction. You'll report your total deductible overtime pay on this schedule and carry the amount to the appropriate line on Form 1040. The IRS is expected to release the form and instructions before the 2026 filing season opens.

Who qualifies

• W-2 employees only. Independent contractors (1099 workers) and self-employed individuals are not eligible. The deduction applies to wages reported on Form W-2.
• Overtime must be at 1.5× or higher. The qualifying pay is for hours worked beyond 40 per week that are compensated at the overtime premium rate (time-and-a-half or greater).
• Tax years 2025 to 2028. The provision is effective for overtime pay earned in tax years 2025, 2026, 2027, and 2028. It expires after TY 2028 unless Congress extends it.

Income phase-out

The deduction phases out at higher income levels:

• Single filers: Phase-out begins at $75,000 AGI
• Married filing jointly: Phase-out begins at $150,000 AGI

If your AGI is below the threshold, you can deduct the full amount of your qualifying overtime pay. Above it, the deduction is gradually reduced. Workers well above these thresholds may receive little or no benefit.

What you need to file

• Form W-2 (total wages)
• Your calculated overtime pay total
• Supporting documentation (pay stubs, timesheets, or time-tracking records)
• The new IRS schedule (when released)

What Records You Need (and How to Organize Them)

If the IRS questions your overtime deduction, the burden of proof is on you. You need good documentation, and you need it organized.

Acceptable records

The IRS hasn't published specific record-keeping requirements for this deduction yet, but based on existing guidance for employment-related deductions, you should maintain:

• Weekly time records showing total hours worked each week (clock-in/clock-out data is ideal)
• Pay stubs that break out regular hours, overtime hours, regular pay, and overtime pay per pay period
• Employer confirmation: a letter or payroll report from your employer verifying overtime hours and pay (especially useful if your stubs don't separate OT)
• Time-tracking app data: exported reports from an app like Hours44 that show daily and weekly hours with overtime flagged automatically

How long to keep records

The IRS generally has three years to audit a return, but this extends to six years if income is understated by more than 25%. Keep your overtime documentation for at least six years after filing the return.

Organizing your documentation

1. Create a folder for each tax year. Physical or digital, whatever you'll actually maintain.
2. Store pay stubs chronologically. If you receive paper stubs, photograph or scan them. Digital stubs from payroll portals should be downloaded as PDFs.
3. Export time-tracking data annually. At the end of each year, export your hours data as a CSV or PDF. Don't rely solely on the app; keep a local backup.
4. Prepare a summary worksheet. Create a simple spreadsheet with columns for week number, dates, total hours, overtime hours, regular rate, and overtime pay. This makes it easy for your tax preparer (or the IRS) to verify your figures.

Start tracking now for TY 2026

If you missed tracking for 2025, do what you can with pay stubs and payroll records. But for 2026 and beyond, start tracking your hours now. The deduction runs through 2028, and tracking hours as you work them is far easier than piecing together records months later.

Common Mistakes to Avoid

The overtime deduction is new, and the first filing year will be messy. Here are the mistakes we expect to see most often.

1. Averaging hours across pay periods

Overtime is calculated per workweek, not per pay period, not per month, not as an annual average. If you worked 50 hours one week and 30 the next, you have 10 overtime hours, not zero. Each week stands on its own.

2. Including non-overtime premium pay

Shift differentials, holiday pay, and bonuses are not overtime pay even if they increase your total W-2 wages. The deduction applies only to the overtime premium, the additional 0.5× (or more) paid for hours over 40 in a workweek. In practice, most workers deduct the full 1.5× overtime rate because the entire overtime hour's pay is considered overtime compensation.

3. Forgetting the income phase-out

If your AGI exceeds $75,000 (single) or $150,000 (married filing jointly), your deduction is reduced. Workers who earn significant overtime may push themselves above the phase-out threshold, especially if they also have a spouse's income on a joint return. Run the numbers before assuming you get the full deduction.

4. Claiming the deduction as a 1099 worker

This deduction is for W-2 employees only. Gig workers, freelancers, and independent contractors don't receive overtime pay in the legal sense and cannot claim this deduction.

5. Not keeping backup records

Saying "I worked a lot of overtime" isn't documentation. You need week-by-week records. If your employer's payroll system is your only source, request the data now. Don't wait until you're preparing your return in March.

Overtime Deduction Examples

Three workers, three different overtime patterns. Actual tax savings depend on your filing status, total income, and tax bracket.

Frequently Asked Questions

Practical Tips

• Start tracking hours now. Even if you missed 2025, the deduction applies through 2028. A time-tracking app like Hours44 gives you automatic weekly overtime calculations you can export at tax time.
• Request pay records from your employer early. Don't wait until April. Payroll departments are busy during tax season. Ask for a complete hours-and-earnings report for the tax year in January.
• Check your state's overtime rules. California requires daily overtime (over 8 hours in a day). Some states have different thresholds. For the federal deduction, use the federal standard of 40 hours per workweek, but your state records may show additional overtime that could be relevant.
• Use the overtime calculator. The overtime calculator lets you plug in your hours and rate to get an instant breakdown of regular vs. overtime pay for any pay period.
• Estimate your tax savings before filing. Use the overtime tax savings calculator to see how much the deduction is worth in your tax bracket before you file.
• Talk to a tax preparer if your situation is unusual. Multiple jobs, mid-year rate changes, or income near the phase-out threshold all add wrinkles that are worth getting a second pair of eyes on.

References

• One Big Beautiful Bill Act (P.L. 119-21), Title VII: No Tax on Overtime — Full text of the enacted legislation establishing the overtime pay deduction for tax years 2025 to 2028.
• IRS: Overtime Pay Information — IRS guidance on the new overtime pay deduction, including eligibility and filing instructions.
• U.S. Department of Labor: Overtime Pay (FLSA) — Federal overtime rules under the Fair Labor Standards Act, including the 40-hour workweek standard.
• IRS Publication 505: Tax Withholding and Estimated Tax — IRS guidance on how withholding works for wages, including overtime pay.
• IRS Record-Keeping Requirements — IRS guidance on how long to retain tax records and supporting documentation.