No tax on overtime is the popular name for an income tax deduction for qualified overtime compensation, added to the Internal Revenue Code as section 225. It removes a capped amount of FLSA-required overtime premium from taxable income. It does not take overtime out of gross income and it does not take it out of payroll tax.
The IRS says that plainly. The deduction does not mean that overtime compensation is excluded or exempt from gross income, and generally overtime compensation is not excludible or exempted from wages for purposes of employment taxes including income tax withholding, social security, and federal unemployment taxes (IRS, Fact Sheet FS-2026-13, Q1). The same answer confirms it is available whether the individual itemizes or takes the standard deduction, and that overtime compensation not required by the FLSA is not eligible for it.
Only the Premium, and Only Where the FLSA Requires It
The statutory definition is narrow on two axes at once.
For purposes of that section, the term qualified overtime compensation means overtime compensation paid to an individual required under section 7 of the Fair Labor Standards Act of 1938 that is in excess of the regular rate, as used in that section, at which such individual is employed, and the term does not include any qualified tip as defined in section 224(d) (Public Law 119-21, section 70202, adding 26 U.S.C. 225(c)).
So the base hour is outside it and only the excess over the regular rate counts, which is the half in time and a half. What that premium is and how the regular rate behind it is derived are set out in overtime premium.
The second axis is who is covered. An individual who is ineligible for overtime under the FLSA does not receive qualified overtime compensation regardless of other laws or circumstances, such as a collective bargaining agreement, providing for overtime pay (IRS, Fact Sheet FS-2026-13, Q4). A contractual overtime rate paid to an exempt employee therefore produces no deduction at all.
Generosity does not help either. If an employer pays more overtime pay than the FLSA requires, for example double time pay that is twice the employee’s regular rate, only the amount minimally necessary to satisfy 29 U.S.C. 207 is qualified overtime compensation for purposes of the tax deduction (IRS, Fact Sheet FS-2026-13, Q16).
The Ceiling and the Taper
The amount allowed as a deduction for any taxable year shall not exceed $12,500, or $25,000 in the case of a joint return (26 U.S.C. 225(b)(1)).
Above an income line the ceiling erodes at a stated rate, which is the part usually left out of summaries. The amount allowable, after applying the cap, shall be reduced, but not below zero, by $100 for each $1,000 by which the taxpayer’s modified adjusted gross income exceeds $150,000, or $300,000 in the case of a joint return (26 U.S.C. 225(b)(2)(A)). For purposes of that paragraph, the term modified adjusted gross income means the adjusted gross income of the taxpayer for the taxable year increased by any amount excluded from gross income under section 911, 931, or 933 (26 U.S.C. 225(b)(2)(B)), which is one of several definitions that share a name and are compared in modified adjusted gross income.
The W-2 Entry Is the Ceiling on What Can Be Claimed
This is the operational trap, and it is written into the statute rather than into a form instruction.
The deduction is an amount equal to the qualified overtime compensation received during the taxable year and included on statements furnished to the individual pursuant to section 6041(d)(4) or 6051(a)(19) (26 U.S.C. 225(a)). Compensation that was paid but never reported is outside the deduction by definition.
The IRS states the consequence directly. Under section 225(a) an employee can only deduct qualified overtime compensation that the employee’s employer included on a properly furnished Form W-2. Notice 2025-69 provided relief from that requirement for tax year 2025, so an employee might not see an entry for 2025 even though they earned qualified overtime compensation, but no relief is available for tax years after 2025, and for those years employees may not consider any amount in excess of what is reported on Form W-2, box 12, code TT (IRS, Fact Sheet FS-2026-13, Q20).
The ceiling runs one way only. If the amount reported in box 12, code TT is overstated, the employee may only consider the actual amount of qualified overtime compensation paid (IRS, Fact Sheet FS-2026-13, Q21). And the reported figure is not the deduction: box 12, code TT carries the total qualified overtime compensation paid, which because of the other limits may not be the amount ultimately deductible (IRS, Fact Sheet FS-2026-13, Q10). Where that code sits on the form is covered in overtime premium.
Starting in tax year 2026, payors and employers are required to separately report qualified overtime compensation on Form 1099-MISC in box 14, Form 1099-NEC in box 1d, or, more commonly, Form W-2 in box 12 using code TT (IRS, Fact Sheet FS-2026-13, Q6).
Withholding Does Not Adjust Itself
An employer may not reduce withholding on wages to account for the qualified overtime deduction unless the employee furnishes the employer an updated and valid Form W-4 accounting for the employee’s expected deduction (IRS, Fact Sheet FS-2026-13, Q8). The 2026 Form W-4 was updated so an employee can account for the deduction at step 4(b) (IRS, Fact Sheet FS-2026-13, Q9).
Left alone, then, the deduction shows up as a refund at filing rather than in a larger paycheck.
Two Conditions, a Start Date and an End Date
- A Social Security number. No deduction is allowed unless the taxpayer includes the individual’s social security number on the return for the taxable year (26 U.S.C. 225(d)). An omission of a correct social security number required under section 225(d) was also added to the list of mathematical or clerical errors (Public Law 119-21, section 70202(d), amending 26 U.S.C. 6213(g)(2)).
- A joint return if married. If the taxpayer is a married individual within the meaning of section 7703, the section applies only if the taxpayer and the taxpayer’s spouse file a joint return for the taxable year (26 U.S.C. 225(e)).
- Start. The amendments apply to taxable years beginning after December 31, 2024 (Public Law 119-21, section 70202(g)).
- End. No deduction is allowed for any taxable year beginning after December 31, 2028 (26 U.S.C. 225(g)). Where this sits among the other deductions the same Act created is in what the One Big Beautiful Bill changed for accounting firms.
What the Deduction Is Not
- Not an exemption. Overtime stays in gross income and stays in wages for employment taxes, so income tax withholding, social security tax and federal unemployment tax all still run on it.
- Not the whole overtime check. Only the excess over the regular rate is qualified, which is one part of overtime pay rather than all of it.
- Not available on contractual overtime alone. If the FLSA does not require the overtime, no amount of it is qualified.
- Not permanent. It has both a start date and a termination date written into the statute.
Common Questions
No. The name describes a capped deduction against taxable income, not an exclusion. The pay is still gross income, income tax withholding still runs on it, and social security and federal unemployment taxes still run on it.
Up to $12,500 for the year on an individual return and $25,000 on a joint return, and only the FLSA-required premium counts toward that. The allowance then falls by $100 for every $1,000 of modified adjusted gross income above $150,000, or $300,000 on a joint return, and cannot go below zero.
For tax years after 2025, nothing can be claimed beyond what the Form W-2 reports in box 12, code TT, because the deduction is defined by reference to the amount included on the furnished statement. A missing or understated entry is a payroll correction to chase before filing rather than a schedule to estimate.
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