2026 No Tax on Overtime Calculator

How the OBBBA overtime deduction works

The One Big Beautiful Bill Act (P.L. 119-21 §70202) added IRC §225 to the Internal Revenue Code. It creates a brand-new federal income tax deduction for "qualified overtime compensation," applies for tax years 2025 through 2028, and sunsets automatically after December 31, 2028 unless Congress renews it.

Three statutory limits shape the deduction. First, there's a hard cap: $12,500 for single and head-of-household filers, $25,000 for married filing jointly. Married filing separately filers cannot claim the deduction at all, because §225(e) requires a joint return. Second, the deduction phases out at $100 per $1,000 of MAGI above $150,000 (single or HoH) or $300,000 (MFJ). Third, the deduction only reduces federal income tax. FICA, state, and local taxes still apply.

The deduction is claimed above the line on a new OBBBA schedule, so you can take the standard deduction and still benefit. The IRS released transition-year guidance in Notice 2025-69, which explains how workers will reconstruct their 2025 qualified overtime from pay stubs (since the 2025 W-2 form is not being modified).

Who qualifies

Eligibility is narrower than the headline suggests. Per §225 and Notice 2025-69, you qualify only if:

• You are a FLSA-covered, non-exempt W-2 employee who is legally required to be paid time-and-a-half for hours over 40 in a workweek (29 USC §207). Salaried-exempt workers (executive, administrative, professional, outside sales) whose employers voluntarily pay OT do not qualify.
• You include a valid Social Security Number on your return (§225(d)).
• If married, you file jointly. Married filing separately is ineligible under §225(e).
• Your MAGI is below the full-phase-out point: $275,000 for single/HoH filers with the full $12,500 cap, or $550,000 for MFJ filers with the $25,000 cap. Smaller premium amounts phase out sooner.
• The overtime is reported on a 2026-or-later W-2 (in box 14 or a new dedicated box), or for tax year 2025 filers, reconstructed from pay stubs per Notice 2025-69.

Self-employed workers and independent contractors don't qualify. §225 is tied to FLSA-required overtime, which only applies to W-2 employees. Tipped workers claim tips under the companion §224 deduction (see our No Tax on Tips Calculator), not §225.

How your savings are calculated

The calculator runs this exact sequence for your inputs:

1. Base cap. Take the smaller of your overtime premium and the statutory cap ($12,500 single/HoH, $25,000 MFJ).
2. MAGI test. Compute MAGI as (regular wages + overtime premium) unless you override it. Subtract the threshold ($150K or $300K) from MAGI; anything above is "excess."
3. Phase-out reduction. Multiply the excess by 10% ($100 per $1,000). Cap the reduction at the base deduction (you can't go below $0).
4. Allowed deduction. Subtract the phase-out from the base cap.
5. Tax before. Apply the 2026 federal brackets to (MAGI − standard deduction).
6. Tax after. Apply the same brackets to (MAGI − standard deduction − allowed deduction).
7. Your savings = tax before − tax after.

Worked example. A single filer with $60,000 regular wages and $5,000 of FLSA overtime premium (roughly 667 hours of OT at a $15 regular rate). MAGI = $65,000, well under the $150K threshold, so the full $5,000 premium is deductible. Taxable income before the deduction is $48,900 ($65K − $16,100 standard deduction), producing $5,620 of federal tax at 2026 brackets. After the deduction, taxable income falls to $43,900 and federal tax drops to $5,020. Net savings: $600, which is the $5,000 deduction times the 12% marginal bracket. FICA of $382.50 (7.65%) is still owed on the premium, independent of this deduction.

Common misconceptions

• Premium, not paycheck. This is the #1 mistake. Time-and-a-half pay is 1.5× your regular rate. The deductible "premium" is only the extra 0.5× portion, which equals one-third of your gross OT paycheck. If you earned $3,000 in gross overtime pay, your qualified overtime is $1,000, not $3,000.
• FICA is untouched. §225 is a federal income tax deduction, period. Social Security (6.2% up to the 2026 wage base of $184,500) and Medicare (1.45% on everything, plus 0.9% Additional Medicare Tax above $200K single / $250K MFJ) still apply to every dollar of the premium. Your pay stub won't change.
• State income tax still applies in most states. §225 is a federal-only deduction. California, New York, and most income-tax states tax every dollar of the overtime premium. A few states (notably Alabama) have their own overtime carve-outs, but most have not conformed. Check your state's rules before assuming savings stack.
• Only FLSA-required overtime qualifies. Contractual double-time above the FLSA 0.5× premium does not count. California's daily overtime over 8 hours does not count if your weekly total stays below 40. Overtime paid to FLSA-exempt salaried workers does not count, even if the employer voluntarily pays it.

Reference table: deduction and savings by overtime premium

All rows assume MAGI is below the phase-out threshold. "Savings @ 12%" and "Savings @ 22%" show the federal income tax cut at typical marginal brackets. Your actual savings depend on where the deduction falls in your bracket stack; the calculator above computes this precisely.

At the statutory cap, a single or HoH filer maxes out at about $2,750 in federal savings (22% bracket) and a joint-filing couple at $5,500. Higher-income workers hitting the 24% bracket see proportionally more, but they're also closer to the phase-out.

Pair this with the Tax Bracket Calculator to see what bracket the deduction touches, the Estimated Quarterly Tax Calculator if the savings change your Q3–Q4 estimates, or the No Tax on Tips Calculator for the companion OBBBA deduction for tipped workers.