Is there a dollar amount of overtime that is tax-free?
The ceiling is the cap: $12,500 of premium, or $25,000 joint. Below the cap, the tax-free piece is half of time-and-a-half, not the overtime check. Above the income threshold the cap shrinks.
How much overtime is tax-free
Five overtime hours a week for 50 weeks at $30, single, $80,000 MAGI, is a $3,750.00 deduction. The whole overtime check is not tax-free. Payroll tax still applies.
Deduction
$3,750.00
The deduction is $3,750.00 after the cap and phase-out.
Annual premium is weekly OT hours × weeks × half the rate, then the cap and phase-out.
Breakdown
| Half-time premium | $3,750.00 |
|---|---|
| Deduction | $3,750.00 |
| Federal income tax saved | $825.00 |
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Premium = weekly OT hours × weeks × rate × 0.5. Deduction = that premium, after the cap and phase-out.
What tax-free means here
The deduction removes the FLSA premium from taxable income. It does not remove straight time, and it does not remove Social Security or Medicare. The cap is $12,500, or $25,000 on a joint return. Married filing separately is zero.
The phase-out cuts $100 for each full $1,000 of modified AGI over $150,000, or over $300,000 joint. The table uses a single filer at $80,000 of MAGI and five overtime hours a week for 50 weeks. Tax saved uses 2026 brackets. The years 2025, 2027, and 2028 use the same cap.
Worked examples
| Premium | $3,750.00 |
|---|---|
| Deduction | $3,750.00 |
| Tax saved | $825.00 |
| Hourly rate | Annual half-time premium | Deduction | Federal tax saved |
|---|---|---|---|
| $15.00 | $1,875.00 | $1,875.00 | $412.50 |
| $20.00 | $2,500.00 | $2,500.00 | $550.00 |
| $25.00 | $3,125.00 | $3,125.00 | $687.50 |
| $30.00 | $3,750.00 | $3,750.00 | $825.00 |
| $40.00 | $5,000.00 | $5,000.00 | $1,100.00 |
| $50.00 | $6,250.00 | $6,250.00 | $1,375.00 |
Common questions
Does the cap double if both spouses work overtime?
The joint cap is $25,000 for the return, not $12,500 each stacked on top of $25,000. Two spouses share that joint cap.
Why does tax saved use 2026 brackets for other years?
The rate file stores 2026 brackets. The deduction cap is the same from 2025 through 2028. A 2025 or 2027 bracket change is not estimated here.
Sources
- 26 U.S.C. § 225: qualified overtime compensation — premium only, $12,500 / $25,000 joint cap, $100 phase-out per $1,000 of MAGI, joint-return rule, 2025–2028
- 26 U.S.C. § 224: qualified tips — $25,000 cap and the same MAGI phase-out
- IRS: Treasury, IRS provide guidance for individuals who received tips or overtime during tax year 2025 (FLSA premium, divide-by-3 example)
- IRS Notice 2025-69: qualified tips and qualified overtime compensation
- IRS FAQ: deduction for qualified overtime compensation
- IRS Form 1040-ES (2026): 2026 brackets, standard deduction, and the overtime and tips deduction reminders
- 29 U.S.C. § 207: FLSA overtime after 40 hours in a workweek, at one and one-half times the regular rate