How Is Overtime Taxed in 2026? Withholding and the New Deduction
By Jhon W · Published 15 October 2026
Overtime is taxed the same way as the rest of your pay. Federal income tax is withheld from it, 7.65% goes to Social Security and Medicare, and state tax applies where your state has one. It is not taxed at a special higher rate.
What changed is the tax return. For 2025 to 2028, workers can deduct the premium part of their overtime, up to $12,500 a year ($25,000 on a joint return). This guide explains both halves: what comes out of an overtime paycheck, and what the deduction gives back.
What is taken out of overtime pay
IRS Publication 15 says overtime compensation is subject to Social Security, Medicare and federal unemployment tax, and to federal income tax withholding. Nothing about that changed in 2025 or 2026. The table shows each line on one hourly paycheck.
| 80 regular hours | 80 hours + 10 overtime | Difference | |
|---|---|---|---|
| Gross pay | $2,000.00 | $2,375.00 | $375.00 |
| Federal income tax | $156.15 | $201.15 | $45.00 |
| Social Security and Medicare | $153.00 | $181.69 | $28.69 |
| Take-home pay | $1,690.85 | $1,992.16 | $301.31 |
The example is a single filer paid $25 an hour every two weeks, with no state income tax. The 10 overtime hours at time and a half add $375.00. Federal withholding rises by $45.00, which is 12% of the overtime pay: the rate of the withholding bracket this paycheck falls in. The worker keeps $301.31.
Why overtime can look taxed more
Withholding is worked out per paycheck as if every paycheck lasted all year. A paycheck with a lot of overtime looks like a higher yearly salary, so the IRS tables withhold more from it, and the top slice of it can fall in a higher bracket than your usual pay.
That is withholding, not your tax. Your real tax is worked out on your total income for the year. If a few heavy overtime weeks pushed withholding above what you owe, the difference comes back in your refund.
One more case: IRS Publication 505 lists overtime pay among supplemental wages, together with bonuses and commissions. When an employer pays overtime separately from regular wages, it may withhold a flat 22% from it. If overtime is on the same check as your regular hours, the normal tables apply.
The overtime deduction for 2025 to 2028
Section 225 of the Internal Revenue Code, added in July 2025, gives a deduction for qualified overtime compensation. It is taken on the tax return, on Schedule 1-A, whether or not you itemize.
- Only the premium counts. Qualified overtime is the pay above your regular rate that the Fair Labor Standards Act requires for hours over 40 in a workweek. At time and a half, that is the "half": one third of the overtime pay.
- Limit: $12,500 a year, or $25,000 on a joint return.
- Income phase-out: above modified adjusted gross income of $150,000 ($300,000 joint), the deduction drops by $100 for each full $1,000 over.
- Married couples must file jointly, and the return must include a Social Security number valid for work.
- Social Security and Medicare are not affected. The deduction lowers federal income tax only.
What does not count
Overtime paid only because of a state law, such as daily overtime after 8 hours, or only because of a union contract or company policy, is not qualified overtime. Neither is overtime paid to an employee the federal law exempts, such as a salaried manager. With double time, only the half-rate premium the federal law requires counts: the IRS example is $400 paid for 10 double-time hours at $20, of which $100 qualifies.
A worked example
Take the same worker, $25 an hour, with 10 overtime hours every two weeks: 260 overtime hours and $61,750 of income for the year.
- Qualified overtime: half the regular rate, $12.50, × 260 hours = $3,250. Overtime pay itself was $9,750.
- The limit is $12,500, and income is under $150,000, so the whole $3,250 is deductible.
- Taxable income falls from $45,650 to $42,400. Federal income tax falls from $5,230 to $4,840: $390 saved.
- Social Security and Medicare on the overtime pay stay at $745.88 for the year.
For a higher earner the phase-out matters. A single filer with $10,000 of qualified overtime and $172,500 of income is $22,500 over the line: 22 full steps of $100 take $2,200 off, leaving a deduction of $7,800.
To run your own numbers from your hours, your overtime pay or your W-2, use our no tax on overtime calculator. It follows Schedule 1-A line by line and shows the tax you save.
Getting the savings in your paycheck
Employers keep withholding on overtime as ordinary wages, and the IRS says they may not lower withholding for the deduction unless you give them an updated Form W-4.
On the 2026 W-4, the Deductions Worksheet has line 1b for qualified overtime. Enter the premium you expect for the year, carry the worksheet total to Step 4(b), and each paycheck has less federal tax withheld. In the example above that is about $15.00 more every two weeks. Our step-by-step guide shows how to fill out Form W-4.
Be careful not to overestimate. If you enter more overtime than you work, too little tax is withheld and you will owe the difference in April.
How you claim it on your return
From 2026, employers report qualified overtime on Form W-2 in box 12 with code TT, in full even when it is over the limit. You enter that amount in Part III of Schedule 1-A, which applies the limit and the phase-out. You can deduct only amounts shown on a W-2 or a corrected W-2c; if the code TT figure is wrong, ask your employer for a correction.
For 2025 returns, employers did not have to report the amount separately, so workers may need to work it out from pay stubs or ask the employer.
State income tax on overtime
The deduction is federal. Each state decides whether to allow it, so the state tax on your overtime may not change. In the nine states without a tax on wages, such as Texas and Florida, overtime has no state income tax at all.
Frequently asked questions
- Is overtime taxed at a higher rate?
- No. Overtime is ordinary wages. A large overtime paycheck can have more withheld because the tables treat it as a higher yearly salary, but your real tax is worked out on your total income for the year.
- Is overtime tax free in 2026?
- No. Income tax is still withheld and Social Security and Medicare still apply. The new rule is a deduction on the return for the premium part of overtime, up to $12,500 ($25,000 joint), for tax years 2025 to 2028.
- How much of my overtime can I deduct?
- Only the part above your regular rate that federal law requires, which is one third of time-and-a-half pay. Straight-time pay for overtime hours does not count.
- Does the overtime deduction lower Social Security and Medicare?
- No. 7.65% of all overtime pay still goes to Social Security and Medicare.
- Do salaried workers get the overtime deduction?
- Only if the federal overtime law covers them and they are paid overtime under it. Exempt salaried employees, such as executives and professionals, have no qualified overtime.
- When does the overtime deduction end?
- After tax year 2028. The law says no deduction is allowed for tax years beginning after 31 December 2028.