Overtime pay is still subject to federal income tax in 2025, but a new deduction can significantly reduce how much of it you actually owe taxes on. For tax years 2025 through 2028, you can deduct the premium portion of your overtime pay, generally the “half” in “time-and-a-half,” up to $12,500 per year ($25,000 if you file jointly). This is a meaningful change from prior years, when every dollar of overtime was fully taxable with no special treatment.
How the New Overtime Deduction Works
The IRS and Treasury issued guidance confirming that individuals who receive “qualified overtime compensation” can deduct the portion of their pay that exceeds their regular hourly rate. If you earn $30 an hour and work overtime at time-and-a-half ($45 an hour), the extra $15 per overtime hour is the part you can deduct. Your base rate of $30 for those overtime hours is still fully taxable, just like your regular paycheck.
To qualify, the overtime must be required under the Fair Labor Standards Act (FLSA), which is the federal law that mandates overtime pay at 1.5 times your regular rate for hours worked beyond 40 in a week. The overtime also needs to be reported on your W-2, 1099, or another specified statement from your employer. Salaried workers who are exempt from FLSA overtime rules generally won’t qualify for this deduction.
The deduction is available whether you itemize or take the standard deduction, so you don’t need to give up your standard deduction to claim it.
Income Limits and Caps
There are two limits to be aware of. First, the deduction itself is capped at $12,500 per year for single filers and $25,000 for married couples filing jointly. If your qualifying overtime premium adds up to more than that, the excess is taxed normally.
Second, the deduction phases out at higher income levels. If your modified adjusted gross income exceeds $150,000 (or $300,000 for joint filers), the deduction begins to shrink. This means the benefit is targeted primarily at workers earning low to moderate incomes, which covers most hourly employees who regularly pick up overtime shifts.
Your Overtime Is Still Taxed at Your Regular Rate
A common misconception is that overtime gets taxed at a higher rate than your normal wages. It doesn’t. All of your earned income, whether from regular hours or overtime, flows into the same pile and is taxed according to the same federal brackets. For 2025, a single filer pays 10% on the first $11,925 of taxable income, 12% on income from $11,926 to $48,475, 22% from $48,476 to $103,350, and so on up to the top rate of 37%.
The reason overtime checks often look more heavily taxed is withholding, not your actual tax rate. When your employer processes a paycheck that’s larger than usual because of overtime, the payroll system may withhold taxes as if you earn that higher amount every pay period. This can push the withholding percentage up temporarily. But when you file your tax return, everything gets recalculated based on your actual annual income. If too much was withheld, you get the difference back as a refund.
What This Means in Real Dollars
Say you earn $25 an hour and work 10 hours of overtime per week at $37.50 an hour. The overtime premium, the extra $12.50 per hour above your base rate, adds up to $125 a week, or roughly $6,500 over a year. Under the new deduction, that $6,500 comes off your taxable income. If you’re in the 22% bracket, that saves you about $1,430 in federal taxes. If you’re in the 12% bracket, the savings come to around $780.
Workers who log heavier overtime could see larger savings up to the $12,500 cap. At the cap, the tax savings range from roughly $1,500 to $2,750 depending on your bracket.
Payroll Taxes Still Apply
The new deduction reduces your federal income tax, but it does not change your Social Security or Medicare taxes. Those payroll taxes (6.2% for Social Security and 1.45% for Medicare) still apply to every dollar of overtime pay, including the premium portion. Your employer matches those amounts on their end. So while your income tax bill drops, the payroll tax line on your pay stub stays the same.
How to Claim the Deduction
You’ll claim this deduction when you file your 2025 tax return in early 2026. Your employer should report your qualifying overtime information on your W-2. Look for details in Box 14, where employers can note special wage categories. You won’t need to itemize deductions to take advantage of this; it functions as an “above the line” deduction available to all eligible filers.
Because this is a deduction rather than an exclusion from withholding, your paychecks during 2025 may not look any different. Your employer will likely still withhold taxes on your full overtime pay throughout the year. The benefit shows up when you file your return and reduce your taxable income, resulting in either a lower tax bill or a larger refund.
State Income Taxes Vary
The federal deduction doesn’t automatically apply to your state income tax. Each state decides independently whether to follow the federal treatment. Some states have no income tax at all, making the question irrelevant. Others have adopted their own overtime exemptions with different rules and expiration dates. Check your state’s department of revenue website to see whether your state offers any additional overtime tax relief for 2025, because the rules and timelines differ significantly from state to state.