No Tax on Overtime (OBBBA): What Workers Actually Get
The One Big Beautiful Bill Act (OBBBA) created a federal income tax deduction for FLSA overtime premiums — but it works very differently from how it was marketed. You don’t stop paying taxes on overtime. You get a deduction at filing time, on part of it, with income limits and a list of exceptions that disqualify more people than the headlines suggest.
What the Law Actually Says
Starting with the 2025 tax year (affecting your 2025 federal return filed in early 2026, and through 2028), eligible workers can deduct the overtime premium portion of their FLSA overtime pay from their federal adjusted gross income. The “premium portion” is defined as the extra half in time-and-a-half — not the full overtime wage.
| What’s deductible | The 0.5× premium on FLSA overtime only (i.e., half the time-and-a-half rate, not the entire overtime paycheck) |
| Max deduction per year | $12,500 (single) · $25,000 (married filing jointly) |
| Phase-out begins | MAGI above $150,000 (single) · $300,000 (MFJ) |
| Fully phased out at | $275,000 (single) · $550,000 (MFJ) |
| Years it applies | 2025, 2026, 2027, 2028 (currently set to expire after that) |
| When you see the benefit | At tax filing — withholding does not change automatically |
| FICA impact | None — Social Security and Medicare still apply to 100% of overtime wages |
| State tax impact | Only if your state separately conforms — most states have not |
What the Premium Portion Means in Real Dollars
If you earn $20/hour and work one hour of overtime at $30 (time-and-a-half), the premium portion is $10 — the extra half above your regular $20. That $10 is what the deduction covers, not the full $30 overtime hour. Over a full year of heavy overtime, this adds up:
| 5 hrs OT/week | $10 premium × 5 hrs × 52 weeks = $2,600 deduction · saves ~$572 in fed tax (22% bracket) |
| 10 hrs OT/week | $10 premium × 10 hrs × 52 weeks = $5,200 deduction · saves ~$1,144 in fed tax |
| 20 hrs OT/week | $10 premium × 20 hrs × 52 weeks = $10,400 deduction · saves ~$2,288 in fed tax |
| Max deduction ($12,500) | Saves up to ~$2,750/yr in fed tax (22% bracket) · ~$3,000 in 24% bracket |
5 Things “No Tax on Overtime” Doesn’t Cover
- FICA taxes — Social Security (6.2%) and Medicare (1.45%) still apply to every dollar of overtime. These are not deductible under this provision.
- State income taxes (in most states) — This is a federal deduction only. California, New York, New Jersey, Illinois, and most other states have not conformed. If you work in one of these states, your overtime premium is still fully state-taxable.
- Non-FLSA overtime — California’s daily overtime rule (overtime after 8 hours/day) qualifies only to the extent it also meets the federal weekly 40-hour threshold. State-only overtime above the daily threshold but under 40 weekly hours does not qualify.
- The self-employed — This deduction applies only to W-2 employees receiving FLSA overtime. Independent contractors, freelancers, and 1099 workers are not covered.
- High-income earners — The deduction phases out starting at $150,000 MAGI (single) and is completely gone above $275,000. For workers in those ranges, the benefit is partial to zero.
States That Have Conformed (and States That Haven’t)
State conformity matters a lot for workers in high-tax states. As of mid-2026, the majority of states have not conformed to the OBBBA overtime deduction. Notable non-conforming states include California, New York, New Jersey, Massachusetts, Illinois, and Oregon — all high-income-tax states where the benefit would have been most meaningful at the state level. A smaller number of states have conformed or are tracking to conform; check your state revenue agency for current status.