By 
The One Big Beautiful Bill Act created a new above-the-line deduction for overtime pay earned by eligible workers starting January 1, 2026. Like the tip deduction, this reduces your federal taxable income without requiring itemization. For workers who regularly put in overtime hours, the savings can be substantial. Here is exactly how it works.
What the Overtime Deduction Is
The OBBBA allows workers who receive overtime pay under the Fair Labor Standards Act (FLSA) to deduct a portion of that overtime pay from their federal taxable income. The deduction applies to the overtime premium, which is the extra 50% paid for hours worked beyond 40 per week.
Key details:
- Maximum deduction: $12,500 per year ($25,000 for married filing jointly)
- Phase-out: Begins at $150,000 AGI single, $300,000 married filing jointly
- Effective: Tax year 2026
- Sunset: December 31, 2028 unless extended
- Applies to: FLSA-covered non-exempt employees only
Who Qualifies: FLSA Non-Exempt Employees Only
This is the most important qualification. The deduction only applies to overtime pay received under the FLSA, which covers non-exempt employees. Non-exempt employees are entitled to overtime pay at 1.5x their regular rate for hours worked over 40 per week.
Generally qualifies:
- Hourly workers in most industries
- Salaried workers earning below the FLSA exempt threshold (currently $58,656/year in 2026)
- Factory, warehouse, and manufacturing workers
- Healthcare workers, nurses, and aides
- Retail workers, grocery store employees
- Truck drivers and transportation workers (some exceptions apply)
Generally does NOT qualify:
- Exempt salaried employees (executives, managers, professionals earning above the FLSA threshold) — these workers are not covered by FLSA overtime requirements
- Independent contractors and gig workers — not FLSA employees
- Self-employed individuals
- Certain agricultural workers
What Counts as the Deductible Amount
The deduction applies to the overtime premium portion of overtime pay, not the entire overtime paycheck. Regular time pay is not deductible. Only the extra 0.5x premium that makes overtime “time and a half” is the deductible amount.
Example: Your regular hourly rate is $20/hour. For overtime hours, you earn $30/hour (1.5x). The overtime premium is $10/hour ($30 – $20). If you worked 200 overtime hours in 2026, your overtime premium is $2,000, which is the deductible amount (assuming you are under the $12,500 maximum).
The Tax Savings Math
| Annual Overtime Premium | Tax Bracket | Deductible Amount | Federal Tax Savings |
|---|---|---|---|
| $3,000 | 12% | $3,000 | $360 |
| $8,000 | 22% | $8,000 | $1,760 |
| $12,500 | 22% | $12,500 (max single) | $2,750 |
| $25,000 | 22% | $25,000 (max MFJ) | $5,500 |
FICA Taxes Still Apply
Like the tip deduction, the overtime deduction reduces federal income tax but does NOT eliminate FICA taxes (Social Security and Medicare). Your overtime pay is still subject to the 7.65% FICA withholding regardless of the income tax deduction. Your employer will still withhold FICA on overtime pay as usual.
How Your Employer Reports Overtime
Your employer reports your total wages (including overtime) on your W-2. There is no separate Box for overtime pay on a standard W-2. To claim the deduction, you need to calculate your overtime premium amount yourself.
How to calculate: review your pay stubs from 2026. Add up all hours worked over 40 in any week. Multiply those hours by your hourly rate to get total overtime pay. Divide total overtime pay by 3 to get the premium portion (the extra 0.5x portion of 1.5x pay). That is your deductible overtime premium amount, up to $12,500 single or $25,000 married.
Keep your pay stubs. The IRS may require documentation of your overtime hours and the premium calculation.
Combined with Tip Deduction
Some workers qualify for both the tip deduction and the overtime deduction. A restaurant worker who earns tips and occasionally works overtime shifts above 40 hours can claim both deductions on their 2026 return. The deductions are separate and do not share a combined cap.
State Conformity
As with the tip deduction, state income taxes do not automatically follow the federal overtime deduction. Check your state’s tax agency for whether your state has conformed to this OBBBA provision.
Hourly to Salary Calculator
Sources: One Big Beautiful Bill Act (P.L. 119-21); IRS OBBBA guidance; Department of Labor FLSA overtime rules. Final IRS regulations pending. This article is for informational purposes only and does not constitute tax advice.
