No Tax on Overtime Calculator Key Takeaways:
- Federal Overtime Deduction: For 2025–28, non‑exempt W‑2 workers can deduct up to $12,500 (single) or $25,000 (joint) of qualified overtime pay from federal income taxes.
- Qualifying Overtime: Only the portion of overtime pay above your normal rate counts (e.g. at 1.5× base pay, you deduct the 0.5× premium per hour). Payroll taxes (Social Security/Medicare) still apply.
- Calculation: Subtract the eligible overtime deduction from your gross income to get new taxable income. Tax savings = (deduction portion) × (marginal tax rate). The examples below illustrate the formula.
What is No Tax on Overtime?
Starting January 1, 2025, the federal government introduced an above-the-line tax deduction for overtime pay.
This means you reduce your gross income by up to $12,500 (single) or $25,000 (married filing jointly) of qualifying overtime wages.
Qualified overtime is defined as the extra pay required by the Fair Labor Standards Act – for example, if your regular rate is $20/hour and your OT rate is $30/hour, the deductible portion is $10/hour.
Tip: qualified overtime pay can be calculated as (OT_rate – base_rate) × overtime_hours.
Once you apply this deduction, your federal taxable income = (regular pay + overtime pay) – (allowed overtime deduction).
For instance, if you earn $50,000 regular salary and $5,000 overtime, and you can deduct the full $5,000 (under the $12,500 limit), your taxable income drops from $55,000 to $50,000.
You then owe less tax – essentially saving your marginal tax rate on that overtime portion.
Remember, Social Security and Medicare taxes still apply to all wages, including overtime, so “no tax” here refers only to federal income tax.
Not everyone qualifies for the full deduction: it phases out for incomes over $150,000 (single) or $300,000 (joint), and you must be a non-exempt (overtime‑eligible) W‑2 employee.
Employers will report qualified overtime separately on your W‑2.
Calculating the Deduction (Formula)
To compute your tax benefit, follow these steps:
- Find your regular and overtime pay. Let Base_rate = your normal hourly wage and OT_rate = your overtime wage (typically 1.5× base). Let H = overtime hours worked. Then Overtime_Pay = OT_rate × H.
- Calculate qualified overtime pay. This is the premium above the base rate:
QualifiedOvertime = (OT_rate – Base_rate) × H. (E.g. if Base_rate=$20 and OT_rate=$30, then each OT hour yields $10 qualified pay.) - Apply limits. You can deduct up to $12,500 (single) or $25,000 (joint) of QualifiedOvertime per year. Let Deduction = min(QualifiedOvertime, 12,500) (or $25,000 for joint filers).
- New taxable income. Subtract this deduction from gross income:
New_Taxable = Gross_Income – Deduction. (Gross_Income includes all wages, regular + overtime.) - Tax savings. Your federal tax is reduced by roughly Deduction × (marginal tax rate). For example, at a 22% bracket, each $1,000 of deductible overtime saves about $220 in federal tax.
In short, the formula for Federal tax owed becomes:
Federal Tax = Tax Rate × (Regular Pay + Overtime Pay – Deduction).
No Tax on Overtime Examples
- Example 1 (Single, small overtime): Amy earns $20/hr and works 5 OT hours at $30/hr. Her overtime pay = $150, qualified overtime = $(30–20)×5 = $50. Since $50 < $12,500, she deducts the full $50. If her marginal tax rate is 12%, her federal tax on that overtime drops from $50×12% = $6 to $0, saving about $6. (She still pays 15.3% payroll tax on all wages.)
- Example 2 (Single, larger overtime): Bob earns $15/hr, works 40 OT hours at $22.50/hr. Overtime pay = $900, qualified OT = $(22.50–15)×40 = $300. He deducts $300 of overtime (below the $12,500 cap). At a 22% tax rate, this cuts his federal tax by ~$66. Without the break he’d owe tax on the full $900; with it he effectively only pays tax on $600 of those OT hours.
- Example 3 (Hit the cap): Carla is a nurse (single filer) with a normal rate of $30, earning 1,000 overtime hours at $45/hr in 2025. Her qualified OT pay = $(45–30)×1,000 = $15,000. She can deduct only $12,500 (cap). The remaining $2,500 of OT pay is still taxed normally. So she saves tax on $12,500 of wages. If her tax rate is 22%, she saves ~$2,750 in federal tax; she still pays tax on the extra $2,500.
- Example 4 (Joint filer): Dan and Eva (married filing jointly) qualify and have $12,000 of qualified overtime in 2025. Since the joint limit is $25,000, they can deduct the full $12,000. If they’re in the 12% bracket, federal tax is reduced by $1,440 (12% of $12,000). If their income were higher (over $300,000 jointly), the deduction would begin to phase out.
- Example 5 (State comparison): Fran lives in Florida (no state income tax) and works overtime, while Gary lives in Illinois. Both have $1,000 of qualified OT. Federally they get the same deduction ($1,000, since under the cap). However, Gary’s $1,000 overtime is still subject to Illinois state tax (around 4.95%), whereas Fran’s state tax on overtime is zero by default. If Illinois enacts its proposed exemption, Gary could save that state tax too.
These examples show how the No Tax on Overtime break works in practice: you identify the overtime premium, cap it by $12,500/$25,000, subtract it from your income, and compute tax on the remainder.
Net effect: more take‑home pay on overtime hours.
State Tax and Local Rules
This federal deduction does not automatically change state tax laws.
States can choose whether to follow or reject the overtime exemption.
In states with no income tax (e.g. Florida, Texas, Washington, etc.), overtime is already untaxed at the state level.
Other states are considering similar breaks: for example, Illinois lawmakers have introduced bills to exclude overtime from state taxable income, and New Jersey is exploring a proposal to exempt overtime pay from state income tax.
North Carolina’s plan would even exempt tips and bonuses alongside overtime.
However, as of mid-2025 no state (besides those with no income tax) has yet fully enacted a permanent “no tax on overtime” rule.
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