Overtime Tax Calculator: OBBBA § 225 Deduction & Savings
Calculate your allowable federal tax deduction under the 2025–2028 "No Tax on Overtime" law (OBBBA § 225). Learn why the deduction covers only the federal 0.5× FLSA premium slice, how statutory caps ($12,500 / $25,000) and phase-outs apply, and how much you will save on your federal tax return.
Calculate Your Federal Overtime Tax Deduction & Savings
Worked Example: Your Overtime Deduction From Your W-2
Your deduction is the qualified overtime compensation your employer reports — only the premium half of FLSA overtime pay (the extra 0.5×), never the full 1.5× amount.
Single filer — $4,800 of qualified overtime. Maria is single, her MAGI is $78,000, and her employer reports $4,800 of qualified overtime compensation. Step 1: the reported figure is already premium-only, so nothing is halved again. Step 2: the Single cap is $12,500 — $4,800 is under it. Step 3: her MAGI is below the $150,000 phase-out start, so nothing is reduced. Her deduction is the full $4,800 — at her 22% marginal rate, that is $1,056 of federal tax saved.
Over the cap. A single filer whose employer reports $15,200 of qualified overtime deducts $12,500 — the cap — not $15,200. (Married filing jointly: the cap is $25,000 and the phase-out starts at $300,000 MAGI; the deduction falls by $100 for every $1,000 of MAGI over the threshold.)
For 2025, employers were not required to report qualified overtime, so use the overtime premium shown on your final pay stub. From 2026 it appears on the W-2 in Box 12 with code TT.
The Complete Guide to the 2025–2028 "No Tax on Overtime" Deduction (OBBBA § 225)
On July 4, 2025, the President signed into law the One Big Beautiful Bill Act (OBBBA). Among its most publicized components was Internal Revenue Code (IRC) § 225, colloquially known as the "No Tax on Overtime" provision.
While popular headlines claimed overtime would become completely tax-free, the reality in the federal tax code is far more nuanced. Section 225 is structured as a targeted, below-the-line federal income tax deduction claimed on Schedule 1-A with strict statutory limitations, income phase-outs, and a firm four-year sunset.
1. What Exactly Qualifies for the OBBBA § 225 Deduction?
Under IRC § 225(b), the deduction applies strictly and exclusively to the statutory FLSA overtime premium. Under the federal Fair Labor Standards Act (29 U.S.C. § 207), covered non-exempt employees must be paid 1.5× their regular rate for hours worked beyond 40 in a workweek.
Section 225 divides your overtime earnings into two distinct pieces:
Fully Taxable as Ordinary Income
The first 1.0× of your hourly wage earned during overtime hours is regular compensation and does NOT qualify for any tax deduction.
Qualifies for OBBBA § 225 Deduction
Only the additional "half" in time-and-a-half (0.5 × regular rate × hours over 40) qualifies for the federal income tax deduction, subject to statutory caps.
2. What Does NOT Qualify? (The California Trap)
Because federal law restricts the deduction to the federal FLSA standard (hours worked in excess of 40 in a workweek), state-mandated overtime extras and contractual premiums are explicitly excluded:
- California Daily Overtime (Hours 8–12): Under California Labor Code § 510, workers receive daily overtime after 8 hours even if their total weekly hours stay under 40. These daily hours do not qualify for the federal deduction.
- California Statutory Double Time (2.0×): All double-time pay—whether required under California law for hours over 12 or negotiated under union CBAs—exceeds the federal FLSA baseline and does not qualify.
- 7th Consecutive Day Premiums: State-mandated premiums for working 7 consecutive days do not qualify unless the hours exceed 40 for the workweek.
- Shift Differentials & Voluntary Bonuses: Discretionary employer bonuses, night shift differentials, and weekend premiums are excluded from qualified FLSA premium totals.
To understand how California daily and double-time overtime is structured, explore ourCalifornia Labor Code § 510 Overtime Guide →.
3. Statutory Caps and the Phase-Out Schedule
Congress enacted strict annual limits to restrict the deduction to low- and middle-income hourly workers:
| Filing Status | Maximum Annual Deduction | Phase-Out Begins (MAGI) | Fully Phased Out (MAGI) |
|---|---|---|---|
| Single | $12,500 / year | $150,000 | $275,000 |
| Married Filing Jointly (MFJ) | $25,000 / year | $300,000 | $550,000 |
| Head of Household | $12,500 / year | $150,000 | $275,000 |
| Married Filing Separately | $0 (Disqualified) | N/A | N/A |
IRS Schedule 1-A Phase-Out Calculation Order
A critical rule under IRS Schedule 1-A guidelines is the strict order of operations for calculating your deduction. The MAGI phase-out reduction must be subtracted after comparing your qualified annual FLSA premium to the statutory cap:
Allowable Deduction = max(0, min(Annual FLSA Premium, Cap) − Reduction)Where:
- Statutory Cap: $12,500 for Single / Head of Household; $25,000 for Married Filing Jointly (MFJ).
- Phase-Out Threshold: $150,000 for Single / Head of Household; $300,000 for Married Filing Jointly (MFJ).
- Phase-Out Reduction:
floor(max(0, MAGI − Threshold) / 1,000) × $100($100 reduction for each complete $1,000 of MAGI above the threshold).
The Canonical Test Case: Consider an employee earning a base wage of $30.00/hr working 10 overtime hours per week ($7,800 annual FLSA premium), filing Single with an annual MAGI of $200,000:
- Capped Premium:
min($7,800, $12,500) = $7,800 - MAGI Phase-Out Reduction:
floor(($200,000 − $150,000) / 1,000) × $100 = 50 × $100 = $5,000 - Allowable Form 1040 Deduction:
max(0, $7,800 − $5,000) = $2,800
Why the order matters: If the $5,000 reduction were erroneously subtracted from the $12,500 cap first ($12,500 − $5,000 = $7,500) and then compared against the $7,800 premium, the deduction would be mistakenly overstated as $7,500. IRS Schedule 1-A requires subtracting the reduction from the actual capped premium, yielding the correct $2,800 allowable deduction.
4. Payroll Withholding vs Annual Form 1040: Why Overtime Is Still Taxed on Paychecks
One of the greatest sources of worker confusion is looking at a bi-weekly paycheck and seeing federal tax still withheld on overtime hours.
The law does not eliminate payroll withholding. Under IRS regulations (Publication 15-T), payroll systems must withhold federal taxes using standard percentage method tables. The OBBBA § 225 benefit is a below-the-line deduction claimed on Schedule 1-A of Form 1040 when you file your annual tax return.
This produces two key consequences:
- FICA Taxes Still Apply in Full: Social Security (6.2%) and Medicare (1.45%) taxes apply to every dollar of overtime pay. OBBBA § 225 provides zero FICA relief.
- State Income Taxes Are Unaffected: State governments (such as California, New York, or Pennsylvania) have not conformed to OBBBA § 225. State tax withholdings remain standard.
5. IRS Form W-2 Box 12 Code 'TT' Reporting
To prevent tax fraud and simplify tax filing, the Internal Revenue Service issued Notice 2025-62 and Fact Sheet FS-2026-13.
Starting with the 2026 tax filing season, employers are legally required to calculate each non-exempt employee's qualified FLSA half-time premium pay and enter the annual total in Box 12 of Form W-2 using Code "TT".
IRS Form W-2 Box 12 • Code TT
When filing your federal tax return, you do not need to guess your overtime hours. Simply look at Box 12, Code TT on your W-2. That reported figure represents your eligible below-the-line deduction, subject to the $12,500 / $25,000 statutory caps and MAGI phase-out. For detailed line-by-line Schedule 1-A claiming instructions and IRS rules, read our W-2 Box 12 Code TT guide.
6. The Worked Example: Real Numbers at $30/Hour
Let's trace the exact math for a single employee earning a $30.00/hour regular wage who works 10 hours of overtime every week with an annual MAGI of $80,000:
$30.00/Hour Base Wage • 10 Overtime Hours/Week • $80,000 MAGI Single
| Component | Formula | Calculation | Result |
|---|---|---|---|
| Regular Hourly Rate | Base Wage | $30.00 / hr | $30.00 / hr |
| FLSA 0.5× Premium Slice | 0.5 × Base Rate | 0.5 × $30.00 | $15.00 / OT hr |
| Annual Overtime Hours | 10 hrs/wk × 52 wks | 10 × 52 | 520.0 OT hrs |
| Annual Qualified FLSA Premium | $15.00/hr × 520 hrs | $15.00 × 520 | $7,800.00 |
| Statutory Cap & Phase-out Check | Single limit $12,500; $80k < $150k | Under cap & under phase-out | 100% Eligible |
| Allowable Form 1040 Deduction | Below-the-Line Schedule 1-A | Min($7,800, $12,500) | $7,800.00 |
| Estimated Federal Tax Savings | Deduction × 22% Marginal Bracket | $7,800.00 × 0.22 | +$1,716.00 Saved |
Take-Home Impact Reconciliation:
At tax filing time, reducing taxable income by $7,800 in the 22% tax bracket lowers the worker's federal income tax liability by exactly $1,716.00. This puts an average of +$33.00/week ($66.00 bi-weekly) back into the worker's pocket as an annual refund.
OBBBA § 225 Scenarios Across Income Brackets
Real mathematical calculations demonstrating deduction caps, tax brackets, and phase-outs.
$30/Hr • 10 OT Hrs • $80k Single
Manufacturing technician working 50h weekly.
- FLSA Premium Slice: $15.00 / OT hr
- Annual FLSA Premium: $7,800.00
- Statutory Cap: $12,500 (Under cap)
- Allowable Deduction: $7,800.00
- Marginal Tax Bracket: 22.0%
- Federal Tax Savings: +$1,716.00
$30/Hr • 10 OT Hrs • $200k Single
Single filer above $150k threshold with premium below cap.
- Annual FLSA Premium: $7,800.00
- Capped Premium: $7,800.00 (min of $7,800, $12,500)
- Phase-Out Reduction: -$5,000 ($50k over threshold)
- Allowable Deduction: $2,800.00 ($7,800 − $5,000)
- Marginal Tax Bracket: 32.0%
- Federal Tax Savings: +$896.00
$45/Hr • 15 OT Hrs • $180k Single
Refinery specialist exceeding $150k threshold.
- Annual FLSA Premium: $17,550.00
- Base Cap: $12,500.00
- Phase-Out Reduction: -$3,000 ($30k over)
- Allowable Deduction: $9,500.00
- Marginal Tax Bracket: 24.0%
- Federal Tax Savings: +$2,280.00
$40/Hr • 12 OT Hrs • $160k MFJ
Healthcare couple filing jointly under $300k limit.
- FLSA Premium Slice: $20.00 / OT hr
- Annual FLSA Premium: $12,480.00
- MFJ Statutory Cap: $25,000 (Under cap)
- Allowable Deduction: $12,480.00
- Marginal Tax Bracket: 22.0%
- Federal Tax Savings: +$2,745.60
How to calculate your no tax overtime?
To calculate your no tax overtime deduction, you isolate the extra half-time premium portion from your total overtime wages and apply IRS annual limits. Under federal tax law for tax years 2025–2028, calculating your qualified overtime compensation follows three simple steps: First, identify your total overtime earnings for all overtime hours worked beyond 40 in a workweek. Second, isolate the 0.5× overtime premium slice from regular pay—if paid at standard 1.5× time-and-a-half, divide your gross overtime pay by 3 (or divide double-time pay by 4); the remaining straight-time rate stays fully subject to regular income tax. Third, apply the annual statutory caps—$12,500 for single filers or $25,000 for married couples filing jointly—and reduce the cap by $100 for every $1,000 your modified adjusted gross income exceeds $150,000 ($300,000 joint). The resulting allowable overtime deduction is claimed as a below-the-line deduction on your tax return to generate your federal tax savings. For example, a worker earning $30/hr with 10 OT hrs/week earns a $7,800 annual premium slice, securing a full $7,800 tax deduction.
How much more money will I get with no tax on overtime?
You will get back an amount equal to your allowable deduction multiplied by your marginal tax rate, rather than receiving your entire overtime pay tax-free. This federal tax deduction is not a total tax exemption or a dollar-for-dollar tax credit. Instead, the overtime deduction lowers the taxable income reported on your annual tax return, reducing your final federal income tax liability. Because the law applies strictly to the half-time premium portion of qualified overtime compensation earned across your overtime hours, your actual cash savings depend directly on where your total income falls across federal tax brackets. For tax years 2025 through 2028, below-the-line deduction rules cap qualifying premiums at $12,500 for single filers and $25,000 for married couples, with a phase-out reduction of $100 per $1,000 of MAGI above $150,000 ($300,000 joint).
| Deduction | Tax Brackets | Federal Tax Savings |
|---|---|---|
| $5,000 | 12% | $600 |
| $5,000 | 22% | $1,100 |
| $5,000 | 24% | $1,200 |
How much will I get back from no tax on overtime calculator?
You will get your money back as a larger tax refund or a smaller tax bill when you file your federal tax return, not as extra cash in your regular paycheck. Throughout the year, employer payroll withholding continues as normal under IRS tables. Your savings arrive only after filing your annual return and claiming the allowable overtime deduction. The interactive tax refund calculator at the top of this page operates as your personal refund estimator for the overtime slice. By evaluating your regular hourly wage, overtime rate, and total overtime earnings, the calculator isolates your qualified overtime compensation—the 0.5× federal overtime premium slice. For tax years 2025 through 2028, this below-the-line tax deduction caps at $12,500 for single filers and $25,000 for married joint filers, with a phase-out reduction of $100 per $1,000 of MAGI over $150,000 ($300,000 joint). Multiplying your eligible deduction by your marginal income tax bracket reveals the exact dollar increase you will receive in your refund.
How does no tax on overtime work if you are salary?
If you earn a salary, whether you qualify for the overtime tax deduction depends entirely on whether your job classification is non-exempt or exempt under federal wage law. Salaried non-exempt workers who receive overtime pay under federal overtime rules qualify for the tax deduction in the exact same manner as hourly workers. For these employees, only the 0.5× premium slice of overtime income earned beyond 40 hours in a workweek qualifies. In contrast, salaried exempt workers earn no overtime compensation and therefore receive no deduction. For tax year 2025, employers may voluntarily report qualified premiums in Box 14 of Form W-2; otherwise, workers must calculate their qualifying amounts from year-end pay stubs before mandatory Box 12 Code TT reporting starts in 2026. You can use our salaried overtime calculator to determine your regular base rate and isolate your premium slice. Under 2025–2028 law, this below-the-line qualified overtime deduction caps at $12,500 single ($25,000 joint) and phases out by $100 per $1,000 of MAGI above $150,000 ($300,000 joint), lowering federal income tax based on your marginal tax rate across federal tax brackets.
Overtime Tax & OBBBA § 225 FAQs
Authoritative answers on the federal overtime deduction, W-2 Box 12 Code TT, and phase-out thresholds.
How does the 2025–2028 'No Tax on Overtime' deduction (OBBBA § 225) work?
Signed into law on July 4, 2025, under the One Big Beautiful Bill Act (OBBBA Code § 225), eligible workers can claim a below-the-line deduction claimed on Schedule 1-A of their federal income tax return for qualified overtime pay. The deduction covers ONLY the statutory FLSA premium slice—defined strictly as half-time (0.5×) the regular rate for hours worked beyond 40 in a single workweek. The straight-time portion (1.0×) remains fully taxable as ordinary income. The deduction is capped at $12,500/year for single filers ($25,000 for married couples filing jointly) and is available for tax years 2025 through 2028.
Why doesn't California daily overtime or double time qualify for the federal deduction?
Federal statute OBBBA § 225 explicitly limits the deduction to the federal FLSA statutory mandate under 29 U.S.C. § 207—overtime hours worked beyond 40 in a workweek. California state-mandated daily overtime (hours 8–12 on shifts where weekly hours stay under 40), California double time (2.0×), and 7th-day premiums are state statutory extras that exceed federal law. The IRS treats all premiums above the federal 0.5× weekly FLSA standard as non-qualifying supplemental compensation.
What are the income phase-out limits for the overtime tax deduction?
The OBBBA § 225 deduction begins phasing out for single filers with a Modified Adjusted Gross Income (MAGI) above $150,000 ($300,000 for married couples filing jointly). Under IRS Schedule 1-A guidelines, the phase-out reduction is subtracted after capping the qualified premium: Allowable Deduction = max(0, min(annual FLSA premium, cap) − reduction), where reduction = floor(max(0, MAGI − threshold) / $1,000) × $100. The cap is $12,500 for single filers ($25,000 MFJ). Because the reduction is applied to the capped premium rather than subtracting from the statutory cap beforehand, a single filer earning a $7,800 FLSA premium with $200,000 MAGI incurs a $5,000 reduction ($50,000 over threshold ÷ $1,000 × $100), yielding an allowable deduction of exactly $2,800 (not $7,500).
Will my paycheck have zero tax withheld when I work overtime?
No. The OBBBA § 225 deduction is a below-the-line deduction claimed when you file your annual federal income tax return (Form 1040 Schedule 1-A), NOT an exemption from payroll withholding. Employers continue to withhold federal income tax, state income tax, and mandatory FICA (6.2% Social Security + 1.45% Medicare) from your overtime pay at payroll time. The tax savings are realized as a larger federal tax refund or a lower tax bill when you file your annual return.
How is qualified overtime reported to the IRS on Form W-2?
Under IRS Notice 2025-62 and Fact Sheet FS-2026-13, employers are required to track qualified FLSA overtime premiums separately and report the annual total in Box 12 of Form W-2 using Code 'TT'. When filing your tax return, you should use the official dollar figure reported in Box 12 Code TT rather than manually estimating your premium pay.
Does the overtime deduction reduce FICA or state income taxes?
No. The OBBBA § 225 deduction applies exclusively to federal income taxes. FICA taxes (7.65% total: 6.2% Social Security up to the wage base cap plus 1.45% Medicare) still apply in full to all overtime earnings. Additionally, state income taxes are unaffected because state tax codes do not automatically adopt this temporary federal deduction.
How do I work out my overtime tax deduction from my W-2?
From 2026, find the qualified overtime compensation in Box 12 of your W-2 (code TT) — that figure is the premium half of your FLSA overtime pay, and it is the starting amount for the deduction. Deduct it up to the cap ($12,500 single, $25,000 married filing jointly), reduced if your MAGI passes $150,000 ($300,000 joint). For 2025 there is no W-2 figure — use the overtime premium on your final pay stub.