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
The Complete Guide to the 2025–2028 "No Tax on Overtime" Deduction (OBBBA § 225)
On July 4, 2025, the President signed into law the Omnibus Budget Reconciliation 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, above-the-line federal income tax deduction 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 an above-the-line deduction claimed on Schedule 1 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 above-the-line deduction, subject to the $12,500 / $25,000 statutory caps and MAGI phase-out.
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 | Above-the-Line Schedule 1 | 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
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 Omnibus Budget Reconciliation Act (OBBBA Code § 225), eligible workers can claim an above-the-line deduction on 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 an above-the-line deduction claimed when you file your annual federal income tax return (Form 1040 Schedule 1), 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.