So, you’ve probably heard the buzz—or maybe you saw a clip on social media—about overtime pay finally being tax-free. It sounds like a dream for anyone pulling 50-hour weeks just to stay ahead of inflation. But if you’re looking at your latest January 2026 pay stub and seeing federal taxes still being bitten out of your time-and-a-half, you might be wondering if it was all just talk.
Honestly? It's complicated.
The short answer is yes, the "No Tax on Overtime" policy is officially in effect. It was signed into law as part of the One Big Beautiful Bill Act (OBBBA) on July 4, 2025. But here is the catch: it doesn't work the way most people think. It’s not an automatic "zero tax" on your weekly paycheck. Instead, it’s structured as a federal income tax deduction that you claim when you file your returns.
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Is the No Tax on Overtime in Effect Yet?
The policy is technically retroactive, meaning it applies to qualified overtime earned from January 1, 2025, through December 31, 2028. If you worked overtime last year, you are eligible to claim the deduction right now during the 2026 tax season.
However, don't expect your employer to just stop withholding federal taxes on those extra hours. Most payroll systems aren't set up to "untax" overtime in real-time. Because of how the law is written, you usually pay the tax upfront throughout the year, and then you get that money back as a larger refund (or a smaller bill) when you file your Form 1040.
How the "Overtime Deduction" Actually Works
There is a massive misconception that all your overtime pay is now tax-exempt. That isn't true. The IRS and the Department of the Treasury have very specific rules about what counts.
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First, the law only applies to the "premium" portion of your overtime. Let's say you make $20 an hour. When you work overtime, you usually get "time-and-a-half," which is $30 an hour. Under the OBBBA, you can only deduct the extra $10 (the "half" part). The base $20 you earned during those overtime hours is still taxed like regular income.
The Numbers You Need to Know:
- Maximum Deduction: You can deduct up to $12,500 of qualified overtime pay if you’re a single filer. If you're married and filing jointly, that cap jumps to $25,000.
- Income Limits: This is for the "working man," so there are phase-outs. If your modified adjusted gross income (MAGI) is over $150,000 (single) or $300,000 (married), the deduction starts to disappear.
- The Hard Cutoff: Once a single filer hits $275,000 or a couple hits $550,000, the benefit is gone completely.
The Payroll Tax Trap
Here is where it gets kinda annoying. Even if you qualify for the federal income tax deduction, you still have to pay payroll taxes. This means Social Security (6.2%) and Medicare (1.45%) are still coming out of every single overtime dollar.
Also, the "No Tax on Overtime" law is a federal thing. If you live in a state with its own income tax—think California, New York, or Georgia—you’ll likely still owe state taxes on that overtime unless your specific state legislature decided to copy the federal law. Most haven't yet.
Why Your W-2 Looks Different This Year
Since we are now in the 2026 tax season, you'll notice something new on your W-2. The IRS introduced a new code for Box 12. Look for the code "TT." This represents your "Total Tax-exempt" (or qualified) overtime compensation.
Employers are now required to track this separately. If your employer didn't track it properly in 2025 because the law was passed mid-year, the IRS allowed them to use a "reasonable method" to estimate it for last year’s earnings. But for 2026, they have to be precise.
Who is eligible?
- W-2 Employees: You must be a "non-exempt" employee under the Fair Labor Standards Act (FLSA). Basically, if you’re an hourly worker who gets time-and-a-half after 40 hours, you're likely in.
- Valid SSN: You need a Social Security number valid for employment.
- No "Married Filing Separately": If you use this filing status, you’re disqualified from the deduction.
The Reality Check
For a lot of people, this isn't going to be a life-changing amount of money, but it's not nothing. If you're in the 12% or 22% tax bracket, deducting $5,000 of overtime premium could put an extra $600 to $1,100 back in your pocket.
The main thing to remember is that this isn't a permanent change. As of now, the law is set to sunset on December 31, 2028. Unless Congress votes to extend it, the "no tax" era ends in three years.
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Actionable Next Steps
If you want to make sure you're actually getting this money, don't just "click through" your tax software this year.
- Check Box 12: Ensure your employer actually filled out the "TT" code. If it’s blank and you know you worked 100 hours of OT, talk to your HR department immediately.
- Adjust Your Withholding: If you want that money now instead of waiting for a refund next year, you can update your Form W-4. The IRS recently updated the W-4 worksheets to include a section for "Qualified Overtime." By increasing your deductions there, your employer will take less out of your check each week.
- Keep Your Pay Stubs: If you're a freelancer or 1099 contractor, this gets way murkier. The law mentions 1099s, but the implementation is still rolling out. Keep meticulous records of any hours worked over 40 in a single week.
- Talk to a Pro: If you’re a high-earner near those phase-out limits ($150k+), it might be worth paying a CPA for an hour of their time. One wrong move on your MAGI calculation could disqualify the whole deduction.