You’ve seen the headlines, or maybe you heard it from a buddy at work: overtime isn’t taxed anymore. It sounds like a dream, honestly. For anyone who has ever pulled a double shift just to see a massive chunk of that extra cash vanish into federal withholdings, the news feels like a long-overdue win.
But here’s the thing. There’s a lot of noise out there. People are looking at their pay stubs right now and wondering why the math isn't mathing. They want to know exactly when does the no tax on overtime kick in and, more importantly, why they still see taxes being taken out.
The reality is a bit more nuanced than the "zero tax" slogan suggests.
The Law Is Actually Already Live
Believe it or not, the policy is already in effect. It was bundled into the One Big Beautiful Bill Act (OBBBA), which President Trump signed into law on July 4, 2025. Because the law was written with retroactive powers, it actually "kicked in" for the 2025 tax year.
If you worked overtime between January 1, 2025, and December 31, 2025, you are eligible for the deduction on the tax return you’re filing right now in early 2026.
Wait, "deduction"? Yeah. That’s the first big hurdle.
Most people expect their weekly paycheck to just... be bigger. But for 2025, the IRS gave employers a bit of a pass because payroll systems are notoriously hard to update on a dime. Most companies didn't stop withholding federal tax from your overtime last year. Instead, you claim that money back as a deduction when you file your taxes this year using the new Schedule 1-A.
For 2026, things are shifting. The IRS has released draft versions of the 2026 W-2 form, featuring a new Box 12 code "TT." This is designed to help employers track and report this specific pay more accurately so that, eventually, your withholdings might actually drop in real-time.
It’s Not All Your Overtime (The "Premium" Problem)
This is where it gets kinda crunchy. The law doesn't say all the money you make after 40 hours is tax-free. It specifically targets what the IRS calls Qualified Overtime Compensation (QOC).
Under the Fair Labor Standards Act (FLSA), overtime is usually "time-and-a-half."
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The "no tax" rule only applies to the "and-a-half" part.
Illustrative Example:
Imagine you make $20 an hour.
When you work overtime, you get $30 an hour.
The first $20 is your "regular rate." The extra $10 is the "overtime premium."
Under the new law, you only get the tax deduction on that extra $10. The base $20 is still taxed like normal income.
It’s a bit of a buzzkill if you were expecting the whole $30 to be tax-free, but it’s still a significant chunk of change if you’re a high-hour worker.
The Limits You Need to Know
Congress didn't just write a blank check. There are some hard ceilings on who can claim this and how much they can take.
- The Cap: You can only deduct up to $12,500 in qualified overtime premiums per year. If you’re married and filing jointly, that number jumps to $25,000.
- The Phase-Out: This isn't for the ultra-wealthy. The deduction starts to disappear if your Modified Adjusted Gross Income (MAGI) hits $150,000 (or $300,000 for joint filers). For every $1,000 you earn over that limit, your deduction drops by $100.
- The Hard Cutoff: If you’re a single filer making over $275,000, you get zero. Sorry.
Also, it’s worth noting that this only applies to Federal Income Tax. You still have to pay Social Security and Medicare (FICA) on every cent of that overtime. And unless you live in a state like Wisconsin—which recently moved to align its state tax laws with these federal changes—you'll likely still owe state income tax on that money too.
Why Your Paycheck Might Still Look the Same
If you’re staring at your January 2026 pay stub and it looks identical to your December one, don’t panic.
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Employers are still catching up. Transitioning payroll for millions of workers is a nightmare of software updates and compliance checks. The IRS provided "penalty relief" for 2025, meaning companies weren't punished if they couldn't separate your "base" overtime from your "premium" overtime on your W-2.
In 2026, that relief is gone. Companies are now required to track it.
You should check with your HR department to see if they’ve updated their Form W-4 systems. The new W-4 has a section (specifically 1b) where you can account for these deductions to lower your withholdings. If you don't update that, the government will just keep holding onto your money until you file your return next spring.
What to Do Right Now
If you’re a non-exempt employee who regularly clocks more than 40 hours a week, you need to be proactive.
First, keep your pay stubs. While the IRS is pushing employers to use the new Box 12 "TT" code, having your own paper trail of hours worked is vital, especially if your employer is slow to adapt.
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Second, if you’re filing your 2025 taxes right now, make sure you (or your CPA) are using Schedule 1-A. This is the "One Big Beautiful Bill" form. If you just hit "import" on your old tax software and don't look for the new deduction, you might accidentally pay thousands in taxes that you don't actually owe.
Third, adjust your expectations. This is a temporary law. As of right now, the "no tax on overtime" provision is set to expire on December 31, 2028. Unless Congress votes to extend it, we go back to the old system in 2029.
Actionable Next Steps:
- Download your 2025 year-end pay stub and calculate your "premium" pay (the 0.5x portion of your 1.5x pay).
- Verify your eligibility based on your total income (ensure your MAGI is under the $150k/$300k threshold).
- Check your 2026 W-4 with your employer to see if you can reduce your federal withholding immediately, rather than waiting for a refund next year.
- Confirm your state’s status to see if they have "decoupled" from federal law or if they are also offering an overtime tax break.