No Tax on Overtime 2026: What You Must Know to File

No Tax on Overtime: The Complete 2026 Filing Guide for Workers and Tax Professionals

By Vicky Sarin

If you’ve been pulling extra shifts, working late, or clocking weekend hours, there’s finally a tax break that rewards your effort. The “no tax on overtime” provision under the One Big Beautiful Bill Act (OBBBA) applies when you file your 2025 tax return in 2026.

But here’s the reality — this is shaping up to be one of the most complex filing seasons in years. It’s not just the overtime deduction. The IRS has cycled through seven acting commissioners in under a year, nearly a quarter of its workforce departed through early retirement programs, and a 43-day federal government shutdown disrupted agency preparations heading into 2026. The Treasury Inspector General warned that the resulting loss of institutional knowledge and IT expertise will make this filing season especially difficult.

For tax professionals and workers alike, the overtime deduction sits at the center of this storm. Here’s everything you need to know to get it right.

What Is the No Tax on Overtime Deduction?

The OBBBA, signed into law in July 2025, introduced a federal income tax deduction for qualified overtime compensation. This constitutes part of a broader set of new temporary deductions that also includes relief for tips, interest on U.S.-assembled car loans (capped at $10,000 for joint filers), and a $6,000 deduction for taxpayers aged 65 and older.

The overtime provision means a portion of your overtime pay can be deducted from your taxable income, starting with tax year 2025 (filed in early 2026).

It is not an exclusion from gross income; it’s a below-the-line deduction. Your adjusted gross income (AGI) stays the same. However, your taxable income can drop, potentially reducing your federal tax bill. Think of it like applying a coupon at checkout rather than a price slash on the shelf. This distinction is crucial for understanding how the deduction impacts your taxable income.

The average tax reduction for eligible workers is approximately $1,400 per year, according to the Tax Policy Center.

Why This Filing Season Is Different

The NAEA’s president, Jennifer MacMillan, EA, bluntly described the current environment in the Winter 2025 EA Journal: between new laws, delayed guidance, and shifting IRS priorities, practitioners are essentially “working on a moving target.” The OBBBA and its technical corrections have landed mid-cycle, and final IRS regulations on some provisions (including whether contractors qualify) are still pending (Pending IRS guidance).

The NAEA immediately engaged with the Treasury and the IRS after the law’s passage to push for clear guidance and updated forms. During EA Advocacy Week in November 2025, 131 enrolled agents in 32 states met with their members of Congress specifically to champion better taxpayer services, clearer guidance, and a well-resourced IRS.

What does this mean for you as a taxpayer or practitioner? Don’t expect smooth sailing. Expect to dig into pay stubs, ask employers hard questions, and document your calculation methods carefully. Take a moment now to list which of these records you already have at hand. This small step helps transform reading into action. The community support of professional groups has never mattered more, as practitioners in the Eduyush community and in forums across the country are sharing live insights on exactly these overtime challenges as they file returns.

Who Qualifies for the No Tax on Overtime Deduction?

• Non-exempt employees under FLSA — You must receive overtime pay as required by Section 7 of the Fair Labor Standards Act (hours worked over 40 per week)
• Valid Social Security Number required — No SSN means no deduction, even if you worked overtime.
• Married Filing Separately filers are excluded — Joint filers or other filing statuses can claim it.
• Exempt salaried workers generally do not qualify — Since they don’t earn FLSA-mandated overtime.
• Self-employed and independent contractors — Still unclear whether they qualify. The IRS has not issued final regulations on this yet.

What Our Eduyush Community Is Saying

This topic is generating significant discussion among tax professionals. One practitioner flagged that even large employers like FedEx have sent letters stating some employees are NOT eligible for the deduction due to FLSA exemptions. Another veteran enrolled agent shared that determining eligibility calls for careful analysis of job classification, not just whether someone received overtime pay.

A former ICU respiratory therapist turned EA added crucial context: hospital holiday “premiums” and state mandates like California’s overtime-after-8-hours rule don’t count for this federal deduction. Only organic FLSA Section 7 overtime — hours performed beyond 40 in a single workweek — qualifies.

The takeaway: don’t assume overtime on a pay stub automatically qualifies. Confirm the worker is non-exempt under FLSA Section 7 first.

How Much Can You Deduct?

For every $1,000 your modified adjusted gross income (MAGI) exceeds the threshold, your maximum deduction shrinks by $100.

The “Half” Rule That Catches People Off Guard

Here’s the part that surprises most taxpayers: only the premium portion of your overtime pay qualifies — not the full overtime rate.

If your regular hourly rate is $20 and you earn $30/hour for overtime (time-and-a-half), only the extra $10/hour qualifies for the deduction. Your base rate portion does not count.

Tax professionals in our Eduyush community have been actively calculating this using a simple method: take the total overtime gross pay and divide by three to isolate the premium “half” portion. One practitioner confirmed this approach after reviewing all of a client’s pay stubs since the ADP payroll system didn’t provide year-to-date overtime figures. Another noted that mid-year raises add to the complexity of matters — a simple spreadsheet tracking pay rate, overtime hours, and calculated premium amounts per period is the most reliable approach.

Double Time, Holiday Pay, and Weekend Premiums — Do They Count?

This is where confusion multiplies, and it’s generating heated talks among enrolled agents preparing returns this filing season.

Double time does NOT qualify. The FLSA only requires time-and-a-half for hours over 40 in a workweek. If your employer pays double time, that’s a voluntary arrangement — not an FLSA mandate. IRS Notice 2025-69 makes clear that payments in excess of the FLSA-required premium are not qualified for the deduction.

Holiday premium pay usually does NOT qualify either. A nurse working holidays at time-and-a-half doesn’t automatically get the deduction. If their total weekly hours didn’t exceed 40, the holiday premium is an employer choice, not FLSA-required overtime.

Weekend and night shift differentials do NOT qualify. The FLSA does not require extra pay for weekend or night work — that’s a matter of agreement between the employer and the employee.

What qualifies: Only FLSA Section 7 requires overtime — hours over 40 per workweek, paid at the mandated premium rate.

The W-2 Problem: Box 14 Confusion in 2025

For 2025 (the first year of the deduction), employers are not required to separately report qualified overtime on Form W-2. The IRS has provided penalty relief for employers who can't break out these figures. Yes, this surprises even seasoned payroll managers, given the usual expectations of precision in reporting. The NAEA recognized this risk early and engaged directly with the Treasury and IRS to advocate for clear guidance and updated forms for the new deductions. Despite those efforts, the transitional year remains messy. Here’s what tax professionals are encountering in real returns:

• Some employers report qualified overtime in W-2 Box 14 — often labeled “FLSA qualified” — but amounts sometimes don’t match actual overtime calculations.
• Many employers provide nothing at all — forcing taxpayers and preparers to calculate overtime from individual pay stubs.
• Government employers (like the Department of Defense) issue special overtime statements — but their labels are confusing. One practitioner in the Eduyush community described a DOD client’s special pay stub that listed “Qualified Overtime pay per PL119-21,” — but it was unclear whether the stated amount was already the reduced qualified portion or the gross overtime figure.
• Even when W-2 Box 14 seems correct, don’t take it at face value. One community member reviewed a client’s W-2 showing “FLSA qualified $360.53” but, by analyzing individual pay stubs, discovered the actual qualified overtime amount was significantly higher. The employer’s reporting was incomplete.

Practical Steps to Calculate Your Deduction

1. Gather all pay stubs for the year — look for year-to-date overtime hours and rates.
2. Confirm your hours exceed 40 per week — only weeks where total hours topped 40 count
3. Isolate the premium portion — typically one-third of total overtime gross (for time-and-a-half). If your employer pays you 1.5x your base rate for overtime, your total OT pay consists of two-thirds of your base rate and one-third of your premium. That one-third is the deductible portion.
4. Account for mid-year rate changes — a raise changes your overtime premium calculation for every pay period after the increase. A simple spreadsheet tracking pay rate, OT hours, and the calculated premium per period is the most reliable approach. One practitioner in the Eduyush community confirmed this method works after reconciling a client’s year of pay stubs.
5. Watch for multiple overtime rates — some employees receive time-and-a-half for standard OT but double time or triple time for other shifts. Only the FLSA-required 0.5x premium qualifies. The amount beyond time-and-a-half (the “double time” or “triple time” portion) does not.
6. Cap at $12,500 (single) or $25,000 (joint) — any qualified overtime above the thresholds is not deductible.
7. Apply the MAGI phase-out — if your modified adjusted gross income exceeds $150,000 ($300,000 joint), reduce your maximum deduction by $100 for every $1,000 over the limit.

Starting in tax year 2026, employers WILL be required to report qualified overtime separately on W-2s. The 2025 filing season is the transitional year that requires extra diligence.

The 2025 Safe Harbor Rule

Since the law wasn’t signed until mid-2025, there’s a one-year safe harbor provision. Employers can average your overtime hours from July to December 2025 to calculate the deduction amount. This smooths out the transition for workers and payroll departments that didn’t start tracking qualified overtime from January.

If your employer uses this safe harbor method, the resulting figure may differ from what you’d calculate using full-year pay stubs. Discuss with your tax professional which method produces the most accurate (and beneficial) result — the IRS permits both reasonable approaches for 2025.

What Payroll Taxes Still Apply?

• Social Security tax (6.2%) on overtime earnings
• Medicare tax (1.45%) on overtime earnings
• State and local income taxes — each state decides separately whether to conform to the federal deduction

This is an important distinction. Some workers expect their entire overtime check to be “tax-free.” In practice, payroll taxes still apply in full, and state tax treatment varies. Don’t confuse the headline — no tax on overtime means a federal income tax deduction, not a complete exemption from all taxes on overtime pay.

When Does the No Tax on Overtime Expire?

The deduction is temporary. Under the current law, it applies only to tax years 2025 through 2028. Unless Congress extends or modifies it, the deduction sunsets after 2028.

That said, members of Congress on both sides of the aisle are already advancing bills that could expand or amend OBBBA provisions — including overtime pay relief. The legislative picture stays fluid.

This three-year window (potentially longer) makes it necessary for enrolled agents and tax professionals to build client workflows now that can handle overtime calculations efficiently during this period.

The Bigger Picture: How the OBBBA Reshapes Tax Practice

The no-tax-on-overtime deduction doesn’t exist in isolation. It’s part of the most significant tax legislation since the TCJA in 2017. The OBBBA permanently extends lower individual tax rates, the enhanced standard deduction, and the §199A small business deduction. It increases the child tax credit, expands the estate tax exemption, and adds the paid family and medical leave tax credit.

For enrolled agents, this means the scope of what clients need help with has expanded dramatically. Returns that were once straightforward W-2 filings now require overtime premium analysis, potential tip deduction calculations, car loan interest verification, and senior deduction eligibility checks — all in a single return.

The NAEA president described the current environment in the Winter 2025 EA Journal as one in which practitioners are persistently adapting to “new laws, delayed guidance, and shifting IRS priorities”. The community emphasis on peer support — through forums, professional groups, and state chapters — reflects how critical real-time knowledge sharing has become. Tax professionals in the Eduyush community are sharing overtime questions and answers almost daily during this filing season.

Filing Season Headwinds: IRS Staffing and Shutdown Aftermath

• Seven acting IRS commissioners in less than 12 months.
• Nearly 25% of the IRS workforce departed through early retirement incentives pushed by the Department of Government Efficiency.
• A 43-day government shutdown (October–November 2025) furloughed nearly half of IRS workers and shuttered hundreds of taxpayer assistance centers for over a month.
• TIGTA’s warning that lost institutional knowledge and IT expertise will directly impact the 2026 filing season

During Advocacy Week in November 2025, 131 enrolled agents in 32 states met with their members of Congress to champion better taxpayer services, clearer guidance, and a well-resourced IRS. These efforts reinforce why the EA credential matters: enrolled agents are the only tax professionals licensed directly by the U.S. Department of the Treasury, bringing a practical, nonpartisan perspective to tax policy at a time when taxpayers need it most.

For workers expecting quick refunds or prompt IRS responses to questions about their overtime deduction: prepare for delays. For tax professionals navigating this landscape, recording everything meticulously is your best protection.

How This Changes the Game for Enrolled Agents

For practitioners already in the field, the overtime deduction turns routine W-2 preparation into investigative work. One EA in the Eduyush community noted that we can no longer trust W-2 data at face value, even when the employer appears to have included proper Box 14 labels — and that this will be a challenging year with what used to be “easy” employee returns.

Another practitioner pointed out the complexity of clients with multiple overtime rates: regular OT at time-and-a-half, double time for certain shifts, and different rates for special assignments — all requiring separate analysis to determine which portions qualify under FLSA Section 7.

If you’re preparing for the EA exam, this is exactly the type of evolving legislation that Part 1 (Individuals) covers. The OBBBA provisions — including no tax on overtime, no tax on tips, and the new senior deduction — are the defining tax changes of this period and are likely testing priorities given their real-world complexity.

• Add an overtime questionnaire to your client intake — ask about FLSA classification, weekly hours, and whether they received any employer overtime statements.
• Request final pay stubs alongside W-2s for all 2025 returns.
• Track state conformity — not all states follow the federal deduction
• Document your calculation method — the IRS allows reasonable approaches, but keep thorough records.
• Lean on your professional community — the NAEA president specifically encouraged practitioners to use forums and peer groups as essential resources during this filing season.
• Don’t forget self-care — the pace of change is relentless. Step away from your desk when you can. This community stands with you through every change of the season.

Frequently Asked Questions on No Tax on Overtime (From Real Tax Professionals and Filers)

My employer pays double time — how do I calculate the qualified overtime deduction?

This is one of the most common questions in our Eduyush community. If your employer pays double time (2x your regular rate), you cannot deduct 50% of the gross. Only the FLSA-required 0.5x premium qualifies. So for double time, you divide the overtime premium by 2 — effectively, only 25% of the total double-time gross pay is deductible. IRS Notice 2025-69, Example 3, confirms this: an employee paid $20,000 in double-time overtime can claim $5,000 ($10,000 premium ÷ 2).

My W-2 Box 14 says “FLSA qualified,” but the amount seems wrong. Should I trust it?

Not automatically. One practitioner in our community reviewed a client’s W-2 showing “FLSA qualified $360.53” in Box 14 — but after analyzing individual pay stubs, discovered the employer had just captured the final pay period, not the full year. The actual qualified overtime was significantly higher. Even when an employer uses the right labels, cross-check against your pay records. For 2025, employers were not required to break out overtime on W-2s, so errors and partial reporting are widespread.

Can union workers and first responders deduct overtime?

Yes — in most cases. Union membership alone doesn’t disqualify you. The key question is whether your overtime is required under FLSA Section 7 (hours over 40 per workweek). Most non-exempt union workers are covered. However, if your collective bargaining agreement provides overtime beyond what the FLSA mandates (for example, double time for certain shifts), only the FLSA-required 0.5x premium applies. First responders (police, fire, EMT) may also have alternative FLSA overtime schedules under Sections 207(k) and 207(j), where overtime triggers after 80 hours in a 14-day period rather than 40 hours per week.

I work at a 37.5-hour-per-week job. My extra hours are labeled “overtime” — does it qualify?

Not necessarily. One EA in the community raised this exact scenario: under a collective bargaining agreement with a 7.5-hour workday, working 8 hours triggered “overtime” pay — but those extra 30 minutes didn’t push the employee past the 40-hour FLSA threshold. Only hours beyond 40 per workweek count under federal law. Employer-designated “overtime” for hours between your regular schedule and 40 hours is NOT qualified overtime for this deduction.

A nurse works holidays and gets paid time-and-a-half. Is that deductible?

Usually not. The FLSA does not require extra pay for holidays, weekends, or night shifts — those premiums are voluntary employer decisions. If a registered nurse works a holiday at 1.5x pay but their total weekly hours don’t exceed 40, that holiday premium is NOT qualified overtime. A former ICU respiratory therapist turned EA in our community made this distinction clearly: hospital “OT Holiday premiums” are categorically different from FLSA-mandated overtime. Only hours exceeding 40 in the workweek, at the federally required rate, qualify.

My employer won’t put overtime in Box 14. How do I calculate the deduction myself?

Several practitioners shared their approach in the Eduyush community: request the client’s final pay stub for the year (which should show year-to-date earnings), confirm hours exceed 40 per week, then use the formula: 0.5 × regular hourly rate × overtime hours = qualified overtime. For time-and-a-half, dividing the total overtime gross by 3 also works. A payroll provider using QuickBooks Desktop confirmed that their software doesn’t isolate overtime premiums; they manually calculate them using that formula and report them in Box 14 for their payroll clients.

I got a “special overtime statement” from the Department of Defense. Can I trust the figure?

Proceed with caution. One Eduyush community member described a DOD client who received a special pay stub stating “Qualified Overtime pay per PL119-21 = $6,625.” The client insisted this was already the reduced deductible amount, but the preparer couldn’t verify that without seeing actual pay stubs. Civilian DOD employees can access their earnings and leave statements through MyPay — but these statements show overtime earnings without year-to-date totals. Request the actual payroll records, not just the special statement, before relying on any employer-provided figure.

What questions should I ask clients before claiming the overtime deduction?

An experienced EA in our community published a checklist that practitioners are now widely adopting:

1. What is your occupation?
2. Are you paid overtime under FLSA, a union contract, state law, or another arrangement?
3. Are you classified as exempt or non-exempt? Salaried or hourly?
4. Is your overtime based on a daily, weekly, or 14-day schedule?
5. Does your final 2025 pay stub include total overtime for the year?
6. What is your regular pay rate? Overtime rate? Holiday rate?
7. How many hours must you work before overtime kicks in?
8. Did your pay rate change during the year? If so, provide rates and effective dates.

If the taxpayer is salaried, they are generally FLSA-exempt and cannot claim the deduction. This intake questionnaire saves hours of exchange later.

Does California’s overtime-after-8-hours rule qualify for the federal deduction?

No. Although some states (including California) mandate overtime pay after 8 hours in a single day, the federal FLSA only requires overtime for hours exceeding 40 in a workweek. State-mandated daily overtime that doesn’t exceed the 40-hour weekly threshold is NOT qualified overtime for this federal deduction. Only the FLSA Section 7 requirement applies.

Is no tax on overtime permanent or does it expire?

The deduction is temporary — it covers tax years 2025 through 2028 only. Unless Congress extends it, the provision sunsets after 2028. However, bipartisan conversations about expanding overtime pay relief are already underway, and some lawmakers are seeking to build on or amend these OBBBA provisions. The legislative picture could change.

How does no tax on overtime work if I also earn tips?

They are separate deductions. Tips earned during overtime hours do NOT qualify for the overtime deduction — they fall under the separate “no tax on tips” provision. You cannot double-dip by claiming the same income under both deductions. If you’re a tipped employee who also works overtime, you’ll need to carefully separate your tip income from your overtime premium when filing.

Do I still pay Social Security and Medicare taxes on my overtime?

Yes. The overtime deduction just reduces federal income tax. Social Security (6.2%), Medicare (1.45%), and any applicable state and local taxes still apply in full to overtime earnings. States individually decide whether to conform to the federal deduction. This is the part most people misunderstand when they hear “no tax on overtime” — it’s a federal income tax deduction, not a blanket exemption from all taxes.

Is there a safe harbor if I make an honest mistake calculating overtime for 2025?

Yes. Because the law was enacted mid-year and W-2 reporting wasn’t required for 2025, the IRS provides transitional relief. There’s a safe harbor rule that allows employers to average overtime hours from July to December 2025. For individual filers, the IRS permits “reasonable methods” for calculating your deduction — but document your approach thoroughly. One community member noted that the safe harbor for honest mistakes this year is a welcome relief, given the unprecedented complexity.

What You Should Do Now

• Gather your pay stubs and confirm your FLSA non-exempt status with your employer.
• Check whether your W-2 Box 14 includes qualified overtime figures — and verify them against your actual pay records.
• Consult with an enrolled agent or tax professional to maximize your deduction and avoid errors.

Once registered, you'll immediately be advising clients on evolving tax law — like the new no tax on tips provision for self-employed and cash-tip workers that's generating questions across the profession

• Review IRS Notice 2025-69 thoroughly for calculation methods and safe harbor rules.
• Build overtime into your client intake process for the 2025–2028 window.
• Understand how the wider OBBBA changes (tips, car loans, senior deduction) interact with the EA exam syllabus as well as real-world practice.
• Consider how the EA certification positions you to handle this kind of evolving legislation — clients need trusted advisors more than ever in seasons like this.

Bottom Line

The no tax on overtime deduction is a meaningful break for hourly workers pulling extra shifts — but it’s not a blanket exemption. Only FLSA-required overtime premiums qualify; the deduction is capped, high earners face phase-outs, and payroll taxes still apply. For 2025 returns, especially, W-2 reporting gaps mean taxpayers and preparers need to dig into actual pay records and document everything.

This filing season arrives with the added headwinds of IRS staffing losses, a prolonged government shutdown, and the vast amount of new OBBBA provisions hitting returns simultaneously. The enrolled agents and tax professionals who thrive this season will be the ones who stay current, lean on their professional community, and refuse to take shortcuts on documentation.

If you’re studying for the EA exam or building a career in tax representation, this moment illustrates exactly why the profession matters. The tax code has never been more complex, the IRS has never been more strained, and taxpayers have never needed qualified enrolled agents more.