Is Overtime Taxed More?
No. An overtime dollar is taxed at exactly the same rate as any other dollar you earn - and from 2025 through 2028, part of it is taxed less. What makes it feel otherwise is withholding: the amount taken from one paycheck is an estimate, and a big overtime week can make that estimate too high. The difference comes back when you file.
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Tax is worked out on the year, not the paycheck
Federal income tax is charged on your taxable income for the whole year, in brackets. In 2026 a single filer pays 10% on the first $12,400 of taxable income, 12% on the next slice up to $50,400, 22% up to $105,700, and so on. Every dollar in a slice is taxed at that slice's rate, whatever it was paid for. There is no separate rate for overtime, bonuses or hours past 40.
Your paycheck, though, is taxed before anyone knows what your year will look like. Payroll has to guess, and the guess is where the "overtime is taxed more" belief comes from. Two mechanics drive it.
Why a big overtime check loses more to withholding
Annualizing. When overtime is paid in the same check as your regular wages, the IRS withholding method treats that check as if it were a normal one and projects it across the year. Take someone paid $25 an hour. A normal 40-hour week is $1,000, which payroll projects to $52,000 a year. A week with 20 hours of overtime pays $1,750 - and payroll withholds from it as if you earned $91,000 a year. A single filer on the standard deduction does not reach the 22% bracket until $66,500 of wages in 2026, so that one check is withheld partly at 22% even though the worker's real year is nowhere near it.
The flat rate. The withholding regulations list overtime pay as a supplemental wage, alongside bonuses and commissions - though an employer may choose to treat it as regular wages instead. When supplemental pay arrives in the same check as regular wages without being stated separately, the two are simply added together and withheld as one payment, which is the annualizing effect above. When it is paid or stated separately, the employer may withhold federal income tax at a flat 22% instead of using the tables (37% on supplemental pay above $1 million a year). For anyone whose real top bracket is 10% or 12%, that is more than the tax actually owed on the money.
Neither of these is tax. They are prepayments. When you file, your actual tax is calculated on the year's total, everything already withheld is credited against it, and the excess is refunded. Overtime can produce a bigger refund. It never produces a higher rate.
The deduction that makes part of overtime tax-free
The 2025 budget law (Public Law 119-21, often called the One Big Beautiful Bill Act) added section 225 to the tax code: a deduction for qualified overtime compensation, available for tax years 2025 through 2028. It is narrower than the "no tax on overtime" headline suggests.
| Rule | What it means |
|---|---|
| Only the premium | The "half" in time-and-a-half. For 10 overtime hours at a $25 regular rate, the overtime pay is $375 but the qualified amount is $125. |
| Only FLSA overtime | Overtime the federal Fair Labor Standards Act requires: hours past 40 in a workweek. Overtime owed only under state law, a union contract or company policy does not count, and neither does any premium above one-half (the extra half on double time, for example). |
| Annual cap | $12,500 of qualified overtime per return, or $25,000 on a joint return. |
| Income phase-out | The cap shrinks by $100 for every $1,000 of modified AGI above $150,000 ($300,000 joint). A single filer at $160,000 can deduct up to $11,500; at $275,000 the deduction is gone. |
| Who can claim | You need a valid Social Security number, and married couples must file jointly. You do not need to itemize - it is claimed on Schedule 1-A alongside the standard deduction. |
| Which taxes | Federal income tax only. Social Security and Medicare are still withheld on every overtime dollar, and state income tax depends on whether your state follows the federal change. |
| Proof | From 2026 your employer reports the qualified amount on your W-2, box 12, code TT, and that figure is the one you claim. |
One year of overtime, followed all the way through
Here is what the rules above add up to for an ordinary hourly worker: $25 an hour, single, standard deduction, no other income. They work 40 hours every week of the year, plus 5 hours of overtime in 26 of those weeks.
| No overtime | With overtime, no deduction | With overtime and the deduction | |
|---|---|---|---|
| Wages | $52,000.00 | $56,875.00 | $56,875.00 |
| Standard deduction | $16,100.00 | $16,100.00 | $16,100.00 |
| Overtime deduction | - | - | $1,625.00 |
| Taxable income | $35,900.00 | $40,775.00 | $39,150.00 |
| Federal income tax | $4,060.00 | $4,645.00 | $4,450.00 |
The 130 overtime hours paid $4,875.00 - 130 hours at $37.50. Of that, $1,625.00 is the premium (130 hours at $12.50), and that is the amount the deduction removes.
- Without the deduction, the overtime added $585.00 of income tax: exactly 12% of $4,875, the same rate as the last dollar of the worker's ordinary wages.
- With the deduction, it added $390.00, an effective 8%. The deduction is worth $195.00 - the $1,625 premium times the 12% bracket.
- Social Security and Medicare at 7.65% take $372.94 either way.
- The worker keeps $4,112.06 of the $4,875 before any state tax.
Now the paycheck side. If this employer paid the overtime separately and withheld the 22% flat rate, it would hold back $1,072.50 over the year against $390.00 of actual tax - $682.50 withheld that the worker never owed. It comes back as part of the refund, months later. That gap, felt check by check, is the whole reason people believe overtime is taxed more.
Notice what the deduction is worth: the premium times your bracket. A 12% filer saves 12 cents per premium dollar, a 22% filer 22 cents. It is valuable, but it is not "no tax on overtime" - roughly two-thirds of every time-and-a-half dollar is ordinary wages and is taxed as such.
Getting less withheld in the first place
If you would rather have the money now than in a refund, you can change your Form W-4. Your employer is still required to withhold on overtime and may not adjust for the deduction on its own - it can only act on a W-4 you give it. The 2026 W-4 has a place for it: line 1b of the Deductions Worksheet takes an estimate of your qualified overtime, up to $12,500, and the worksheet total goes in Step 4(b), which lowers withholding across the year. Estimate conservatively: if your overtime falls short, or your state does not follow the deduction, over-claiming turns a refund into a balance due.
Before you count on the deduction
Two things decide whether any of your overtime qualifies, and both happen at work rather than on the tax return.
You have to be owed FLSA overtime at all. Salaried employees who are exempt under the duties and salary tests receive no FLSA overtime, so there is nothing to deduct, whatever extra pay they get for long weeks. The salaried overtime eligibility guide covers that test and the 2026 thresholds.
The premium is half the regular rate, not half your hourly wage. Non-discretionary bonuses, shift differentials and commissions raise the regular rate, which raises both the overtime you are owed and the amount that qualifies for the deduction. The guide to what counts toward overtime pay shows how that rate is built - and the W-2 code TT figure should match it.
To see what a particular week pays, the overtime calculator works out the hours past 40 and the premium; the paycheck calculator shows what lands in your account after federal tax, state tax and FICA.
FAQ
Why did my overtime check have so much more tax taken out?
Because withholding on that check was estimated as if every week paid that much. A check inflated by overtime projects to a higher annual income and a higher bracket than your real year will reach. The excess is credited back when you file. Your actual tax on the overtime is your ordinary bracket rate.
Is overtime tax-free now?
Partly, for federal income tax only, and only from 2025 through 2028. The deduction covers the premium portion of FLSA-required overtime, up to $12,500 a year ($25,000 joint), and phases out above $150,000 of modified AGI ($300,000 joint). Social Security, Medicare and, in most cases, state income tax still apply in full.
Does working overtime push me into a higher tax bracket?
It can move some income into the next bracket, but only the dollars above the bracket line are taxed at the higher rate. Everything below it is taxed exactly as before. Earning more never makes you take home less because of federal income tax brackets.
My employer pays double time on Sundays. Does all of it qualify?
No. Only overtime the FLSA requires qualifies, and only the half-time premium on it. If those Sunday hours are also hours past 40 in the week, the qualifying amount is one-half of your regular rate for those hours; the rest of the double-time premium is ordinary pay. If they are not past 40 that week, none of it qualifies.
I live in a state with daily overtime. Does that count?
Not for this deduction. Overtime owed only because of state law - such as California's hours past 8 in a day, when the week stays under 40 - is not FLSA overtime and is excluded. Weekly hours past 40 still count, wherever you work.
Figures last verified: October 2026. Statute: 26 U.S.C. §225 (qualified overtime compensation), added by Public Law 119-21 (2025); Fair Labor Standards Act §7, 29 U.S.C. §207. 2026 tax brackets and standard deduction: Rev. Proc. 2025-32. Withholding: 26 C.F.R. §31.3402(g)-1 (supplemental wages); IRS Publication 15 (2026). Form W-4 (2026), Deductions Worksheet line 1b. History: U.S. Department of Labor, FLSA 1938. Reporting: Form W-2 (2026) box 12, code TT; Schedule 1-A (Form 1040). Every figure in the worked example was computed rather than transcribed, and re-derived by a second method before publication.
💡 Did you know?
The 40-hour week was not in the Fair Labor Standards Act from day one. When the Act took effect on October 24, 1938, the maximum workweek before overtime was 44 hours. The forty-hour line every overtime rule now starts from - including the 2025 tax deduction - came later.