You’ve probably heard the catchphrase by now. It was all over the news cycles last summer: "No tax on overtime." It sounds like a dream for anyone pulling those grueling 60-hour weeks at the warehouse or the hospital. But here we are in January 2026, and if you’re looking at your latest pay stub, you might be wondering where that extra money went.
Honestly, the reality of the One Big Beautiful Bill (OBBB) Act, which President Trump signed into law on July 4, 2025, is a bit of a mess. It didn't actually stop the government from taking taxes out of your overtime pay every week. Instead, it created a weird, retroactive deduction that you have to claim yourself when you file your taxes.
Basically, the "No Tax on Overtime" law is more like a "Maybe Get Some Overtime Tax Back Later" law.
The $12,500 Catch: How the Overtime Tax Law Actually Works
Most people assume "no tax" means the IRS keeps its hands off your time-and-a-half. That’s not what happened. The law, specifically Section 70202 of the OBBB Act, allows you to take a federal income tax deduction for what the IRS calls "qualified overtime compensation."
Here is where it gets tricky. The deduction is capped at $12,500 per year for single filers and $25,000 for married couples filing jointly. If you’re married but filing separately? You’re out of luck. You get zero.
But wait, it’s not even the whole overtime check that’s tax-free. The law only covers the "extra" part of your pay. Let’s say you make $20 an hour normally. When you work overtime, you get $30 an hour. Under this new rule, only that extra **$10 per hour**—the "and-a-half" part—is eligible for the deduction. The base $20 you earned during those overtime hours is still taxed like regular income.
Who is actually eligible?
- Non-exempt hourly workers: If you’re covered by the Fair Labor Standards Act (FLSA), you’re the target audience.
- Salaried workers under the threshold: If you make a salary but earn less than the federal threshold (currently holding at $684 per week for 2026) and your employer pays you overtime, you might qualify.
- Income limits: If you make too much, the benefit vanishes. The deduction starts phasing out if your Modified Adjusted Gross Income (MAGI) hits **$150,000** ($300,000 for joint filers). By the time a single person hits $275,000, the deduction is gone.
Why Your 2025 W-2 Might Be a Headache
We are currently in the first-ever "Overtime Tax Season." Because the law was passed halfway through 2025 and made retroactive to January 1, 2025, payroll companies were caught completely off guard.
The IRS basically gave employers a "grace period" for the 2025 tax year. They aren't punishing companies if they didn't track your overtime separately last year. This means your 2025 W-2 might not actually show your "qualified overtime" in a specific box. You might have to dig through your own old pay stubs and do the math yourself.
For the 2026 tax year, things are changing. The IRS has released a draft W-2 that includes Code TT in Box 12. This is where your employer is supposed to list your total qualified overtime premium. If they don't do it right, you could be looking at a much smaller refund than you expected.
Real-World Example: The "Double Time" Trap
Imagine you work for a company that pays double time for holiday shifts. You might think, "Great, I'll deduct the whole extra half of my check!" Nope. The law specifically follows FLSA standards. Even if your boss pays you double time ($40 on a $20 base), the IRS only lets you deduct the amount required by federal law, which is usually just the 1.5x rate. In this case, you’d still only deduct $10 per hour, not the full $20 premium.
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The Taxes You Still Have to Pay (No Matter What)
This is the part that makes people the angriest. The "No Tax on Overtime" law only applies to federal income tax. It does absolutely nothing to stop the other taxes that eat your check.
Even if you qualify for the full $12,500 deduction, you still have to pay:
- Social Security Tax (6.2%)
- Medicare Tax (1.45%)
- State Income Tax: Unless you live in a state like Florida or Texas, your state probably hasn't updated its laws to match the federal deduction yet.
- Local Taxes: If your city takes a cut, they’re still taking it.
So, while the political slogan was "No Tax," you’re realistically still losing about 8% to 15% of that overtime pay to other taxes before you even see the federal "refund" at the end of the year.
Is This Law Permanent?
Not even close. Like many of the tax changes in the OBBB Act, the overtime deduction is a "sunset" provision. It is currently scheduled to expire on December 31, 2028.
Unless a future Congress votes to extend it, we’ll go right back to the old system in 2029. This creates a weird incentive for people to work as much overtime as possible over the next three years while the "discount" is active. Some economists, like those at the Tax Foundation, have pointed out that this might lead to burnout, especially in high-demand fields like nursing or manufacturing, where workers are already stretched thin.
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Actionable Steps for the 2026 Filing Season
If you worked a lot of extra hours last year, don't just hand your W-2 to a tax preparer and hope for the best.
Gather your records. If your employer didn't use the new reporting codes for 2025, you need your final pay stub from December. Look for a line item that says "Overtime Premium" or "OT Pay."
Check your MAGI. If you’re a high-earner who picks up extra shifts, calculate your Modified Adjusted Gross Income. If you're over $150k, your deduction starts shrinking by $100 for every $1,000 you earn over that limit.
Use Schedule 1-A. This is the new form specifically for the overtime and tip deductions. Make sure your tax software (like TurboTax or H&R Block) is updated to the latest 2026 versions, or your "qualified overtime" won't be calculated correctly.
Talk to your HR department. Ask them if they are ready for the 2026 W-2 requirements. Since the IRS will start fining companies $60 to $680 per W-2 for incorrect reporting starting this year, your payroll department should be tracking your "qualified overtime" in real-time now.
The law is complicated and honestly a bit of a burden on the worker to prove their eligibility. But if you're hitting that $12,500 cap, it could mean thousands of dollars back in your pocket. Just don't expect it to show up in your weekly paycheck—it’s a "wait and see" game with the IRS.