The One Big Beautiful Bill Act (P.L. 119-21) created a new federal income tax deduction on qualified overtime pay. The maximum deduction is $12,500 per taxpayer ($25,000 for married filing jointly). Like the tip deduction, it’s a below-the-line deduction claimed on the new Schedule 1-A regardless of whether you itemize, applies to tax years 2025 through 2028, and phases out at higher incomes. Because it’s below-the-line it reduces taxable income but not AGI, so it doesn’t help with AGI-based limits (Roth IRA eligibility, EITC, Medicare IRMAA, ACA subsidies).
Most people get this wrong: the deduction applies to the premium portion of your overtime, not your full overtime hours.
What “qualified overtime” actually means
Qualified overtime under the OBBBA is the excess over your regular rate of pay that you receive for working more than 40 hours in a workweek under the Fair Labor Standards Act (FLSA).
If you make $20 an hour and work 50 hours one week, your standard FLSA-required overtime rate is time-and-a-half ($30) for the 10 overtime hours. Your overtime pay totals $300, but only the premium half-time portion ($10 × 10 = $100) is the “qualified overtime” eligible for the deduction. The other $200 is regular wages at your normal rate.
This matters for the math. To hit the $12,500 deduction cap on the half-time premium alone, a $20/hour worker would need roughly 1,250 hours of overtime in a year, about 24 overtime hours every week. Most overtime workers won’t approach the cap.
The deduction also applies only to overtime required by the FLSA. Voluntary “overtime” agreements that exceed FLSA minimums don’t qualify; only the federally-mandated time-and-a-half (or higher rate set by FLSA for specific jobs) counts.
Who qualifies
You qualify if all of the following are true:
- You are an employee subject to FLSA overtime rules (most non-exempt hourly and certain salaried workers).
- The overtime appears on a W-2 or, in narrow cases, a 1099.
- Your modified adjusted gross income is below the phaseout threshold.
Salaried, exempt employees (typically those classified as executive, administrative, professional, or outside sales under FLSA) generally do not earn FLSA overtime and therefore have nothing to deduct under this provision.
How the phaseout works
| Filing status | Phaseout begins | Maximum deduction |
|---|---|---|
| Single | $150,000 MAGI | $12,500 |
| Married filing jointly | $300,000 MAGI | $25,000 |
These are the same income thresholds as the tip deduction. The deduction reduces above each threshold; the exact phaseout slope is set by IRS regulations.
How employers report it
Per IRS guidance, employers are expected to report qualified overtime separately on the W-2 starting with tax year 2025, likely in a new box or on a supplemental statement. Check your W-2 carefully when you receive it in early 2026. If your employer hasn’t broken out qualified overtime, request a corrected W-2 or a supplemental statement showing the breakdown.
How to claim it
Claim the deduction on the new Schedule 1-A, which flows into your 2025 Form 1040 (filed by April 15, 2026). You’ll enter the qualified-overtime portion as reported on your W-2.
The deduction is calculated per taxpayer, so a married couple where both spouses earn FLSA overtime can each deduct up to $12,500, for a household maximum of $25,000.
What this is not
This is a federal income tax deduction. It does not change:
- Social Security and Medicare (FICA) taxes still apply to all overtime wages.
- State income tax. Most states will tax your overtime at their normal rates unless they explicitly conform to the OBBBA.
- Your employer’s payroll tax obligation.
The deduction also doesn’t change FLSA rules. If you’re misclassified as exempt and not paid overtime you should be receiving, the OBBBA deduction doesn’t help. That’s a Department of Labor wage-and-hour issue, separate from tax law.
Common mistakes
Counting full overtime hours instead of the premium. $20/hour × 10 overtime hours pays $300 total, but only the $100 premium is the deduction-eligible portion.
Including voluntary overtime not required by FLSA. Internal company policies that pay extra for hours above 35 or for weekend work are generally not FLSA-qualified.
Assuming exempt salaried workers can claim it. If you don’t earn FLSA overtime, you have nothing to deduct here.
Missing the W-2 line. Your employer must report qualified overtime separately. If your W-2 doesn’t show it broken out, you’ll need a supplemental statement to claim the deduction accurately.
Next action
For 2025 filing: confirm with your employer how they’re reporting qualified overtime on the W-2. Track your weekly hours to estimate the half-time premium for the year. Claim the deduction on your 2025 Form 1040. The provision is scheduled to sunset after tax year 2028.