Quick Answer
The new overtime deduction allows hourly workers to deduct 25% of qualifying overtime pay from their taxable income. If you earned $8,000 in overtime, you could deduct $2,000, saving $240-$740 in federal taxes depending on your bracket.
Best Answer
Sarah Chen, CPA
Best for hourly employees earning regular overtime at time-and-a-half rates
Understanding the overtime deduction
The overtime pay deduction is an above-the-line deduction that reduces your adjusted gross income. You can deduct 25% of qualified overtime compensation, with no annual dollar limit. The deduction applies only to the premium portion of overtime pay (the extra 50% above your regular rate).
What qualifies as overtime for the deduction
Eligible overtime: Time-and-a-half pay for hours over 40 in a workweek under the Fair Labor Standards Act (FLSA)
Not eligible: Double-time pay, shift differentials, weekend premiums (unless over 40 hours), or comp time
Example: Manufacturing worker earning overtime
Let's say you're an hourly worker earning:
Calculating the deduction:
Overtime premium portion: 500 hours × $12.50 = $6,250
Deduction amount: $6,250 × 25% = $1,563
Tax impact:
Key requirements and limitations
How this appears on your tax return
The overtime deduction is claimed on Form 1040 Schedule 1 as an adjustment to income. You'll need to calculate the premium portion of your overtime pay and apply the 25% deduction rate.
What you should do
Request a detailed breakdown of your overtime pay from your employer's payroll department. Many employers will start providing this automatically for 2026, but it's worth confirming. Track your overtime hours independently to verify the calculations.
Use our W-4 optimizer to determine if you should adjust your withholding to account for this deduction, especially if you work consistent overtime.
Key takeaway: Hourly workers can deduct 25% of their overtime premium pay (the extra 50% portion), with no dollar limit, potentially saving $200-$1,000+ annually depending on overtime worked.
*Sources: [IRS Publication 15](https://www.irs.gov/pub/irs-pdf/p15.pdf), [Department of Labor FLSA Guide](https://www.dol.gov/agencies/whd/flsa)*
Key Takeaway: The overtime deduction lets hourly workers deduct 25% of their overtime premium pay with no dollar limit, saving $200-$1,000+ annually.
Overtime deduction savings by annual overtime premium and tax bracket
| Annual OT Premium* | 25% Deduction | 12% Bracket Savings | 22% Bracket Savings | 24% Bracket Savings |
|---|---|---|---|---|
| $2,000 | $500 | $60 | $110 | $120 |
| $5,000 | $1,250 | $150 | $275 | $300 |
| $10,000 | $2,500 | $300 | $550 | $600 |
| $20,000 | $5,000 | $600 | $1,100 | $1,200 |
More Perspectives
Marcus Rivera, CFP
Best for workers earning substantial overtime (20+ hours/week) or in high-paying hourly roles
Maximizing the overtime deduction for high earners
If you're earning significant overtime—20+ hours weekly or working in high-paying hourly roles like skilled trades, nursing, or technical positions—this deduction can provide substantial tax relief without a cap.
Example: Skilled electrician with heavy overtime
Strategic planning considerations
Withholding adjustments: High overtime earners often face underwithholding because overtime pushes them into higher brackets. Factor the deduction into your W-4 calculations.
Quarterly payments: If you're earning enough overtime to require estimated payments, the deduction reduces those obligations.
Retirement planning: Use overtime tax savings to maximize 401(k) contributions, especially if overtime income is irregular.
Multi-job scenarios: If you work overtime at multiple jobs, you can claim the deduction for qualifying overtime from all employers, as long as each follows FLSA rules.
Advanced considerations
The unlimited nature of this deduction makes it particularly valuable for:
Key takeaway: High overtime earners can save $1,000-$3,000+ annually with no deduction limit, making withholding optimization crucial for tax planning.
Key Takeaway: High overtime earners save $1,000-$3,000+ annually with no deduction cap, making strategic withholding planning essential.
Sarah Chen, CPA
Best for families where one or both parents work hourly jobs with overtime
Family tax planning with overtime deductions
For families where parents work hourly jobs, the overtime deduction can significantly impact overall tax liability and eligibility for family credits. Both spouses can claim the deduction if both work qualifying overtime.
Example: Two-income family with overtime
Impact on family benefits
Lower adjusted gross income from the overtime deduction can help families qualify for or increase:
Special considerations for families
Childcare coordination: Parents working extensive overtime may have higher childcare costs, but these could qualify for the Child and Dependent Care Credit.
Filing status optimization: The deduction may make married filing jointly more beneficial even in borderline cases.
Education planning: Use overtime tax savings to fund 529 plans or take advantage of education credits.
Key takeaway: Family overtime deductions lower AGI, potentially triggering additional credits and benefits worth more than the direct tax savings from the deduction itself.
Key Takeaway: Family overtime deductions create compounding benefits by lowering AGI for additional credits and benefit eligibility beyond direct tax savings.
Sources
- IRS Publication 15 — Employer's Tax Guide - Wage and Tax Statement Requirements
- Department of Labor FLSA Guide — Fair Labor Standards Act Overtime Requirements
- One Big Beautiful Bill Act — Section 128 - Deduction for Overtime Compensation
Related Questions
Reviewed by Sarah Chen, CPA on February 28, 2026
This content is for educational purposes only and is not a substitute for professional tax advice. Consult a qualified tax professional for advice specific to your situation.