Guides / No Tax on Overtime

By NorseHorse. Updated October 16, 2026. General information, not tax advice; confirm your situation with a tax professional.

For 2026 you can deduct qualified overtime on your federal return, but only the extra "half" of time-and-a-half that federal law requires, up to $12,500 a year ($25,000 on a joint return). If your employer takes a tip credit, that half is figured on at least the full minimum wage, not your cash wage. For 2026 the deduction is limited to what your employer reports in box 12 of your W-2 with code TT, so a payroll mistake costs you twice.

What counts as qualified overtime

The Fair Labor Standards Act (FLSA), the federal wage law, generally requires overtime at one and a half times your regular rate for hours over 40 in a workweek. The deduction covers only the premium that section 7 of the FLSA requires. The IRS formula for each workweek is: hours over 40, times one-half, times your FLSA regular rate.

• Double time: only the FLSA half counts. In the IRS example, a $20 an hour worker with 10 overtime hours paid at double time gets $400 for those hours, but only $100 is qualified overtime.
• State daily overtime: overtime paid because a state law requires it, such as pay for hours beyond 8 in a workday, does not count unless the FLSA also requires it. The same goes for overtime under a union contract, weekend or holiday premiums, and overtime your employer pays on its own initiative.
• Exempt employees: if you are exempt from FLSA overtime (many salaried managers are), you get no deduction, whatever another law or contract pays you.

How the premium works when you're paid tips

When your employer takes a tip credit (pays a cash wage below minimum wage and counts your tips toward the rest), the Department of Labor says overtime must be figured on the full minimum wage, which is $7.25 an hour federally. The employer can't take a bigger tip credit in an overtime hour than in a regular hour. Under federal regulations your regular rate includes the tip credit, tips above the tip credit stay out of it, and if your state's minimum wage is higher, your regular rate can't be lower than that minimum.

So at the federal minimum, your qualified overtime is half of $7.25, about $3.63 for each hour over 40. It is not half of a $2.13 cash wage. If your employer uses the cash wage, you are shorted on overtime pay and on your deduction. Check your numbers with the tipped overtime calculator, and see your state's rules on the tipped minimum wage page.

The limits

• Cap: $12,500 per return, or $25,000 on a joint return.
• Phase-out: the deduction shrinks when your modified adjusted gross income (MAGI) is over $150,000 ($300,000 joint). MAGI here is your adjusted gross income from Form 1040 line 11b plus a few kinds of excluded foreign and territory income, so for most people it equals AGI. Schedule 1-A takes $100 off for each full $1,000 over the line.
• Married: you must file jointly to claim it.
• SSN: you need a Social Security number that is valid for employment.
• Standard deduction: you get it whether you itemize or not.
• Years: 2025 through 2028.
• Income tax only: overtime pay is still wages for employment taxes, including income tax withholding and Social Security.

Box 12 code TT on your 2026 W-2

Starting with 2026, employers must report qualified overtime on your W-2 in box 12 with the new code TT. That code is the limit of what you can deduct. For tax years after 2025, the IRS says you may not count any qualified overtime above what box 12 code TT shows. For 2025 the IRS gave relief from that rule. For 2026 there is none.

• If code TT is missing or too low, ask your employer for a corrected W-2 (Form W-2c). If the employer won't or can't issue one, you can't deduct the missing amount, even if you were paid it.
• If code TT is too high, you can only deduct what you were actually paid.
• Your employer must give you your 2026 W-2 by February 1, 2027. Compare TT with your pay stubs and your own hours before you file.

Taking the tips and overtime deductions together

Both deductions go on Schedule 1-A, the new IRS schedule for these additional deductions. Part II is qualified tips, reported on your W-2 in box 12 with code TP (see W-2 box 12 code TP). Part III is overtime, from code TT. Each part has its own cap: $25,000 for tips and $12,500 for overtime ($25,000 joint). Schedule 1-A adds them up and the total goes on Form 1040 line 13a. The steps are in how to claim no tax on tips.

Your employer will not cut your withholding for the deduction on its own. If you want smaller withholding during the year, give payroll a new Form W-4: the 2026 form's step 4(b) worksheet has lines for qualified tips and overtime.

Worked example

You're single and serve in a state with a $12 minimum wage, and your employer takes a tip credit. In 2026 you work 200 hours over 40 across the year.

If your top bracket is 12 percent (for a single filer, taxable income between $12,400 and $50,400), the $1,200 overtime deduction cuts your federal income tax by $144. You still owe Social Security and other employment taxes on the full $1,200. If your W-2 shows only $300 in code TT because payroll figured the premium on a $3.00 cash wage instead of the minimum wage, $300 is all you can deduct until the employer corrects it.

State taxes

State income tax is a separate question, and each state decides for itself. Alabama, for example, has its own deduction for the overtime premium on the state return for 2026 through 2028, capped at $1,000 per taxpayer. The No Tax on Tips calculator shows how your state treats tips for 2026.

Common questions

Does California-style daily overtime count for no tax on overtime?

Only to the extent the FLSA would also require it. Pay for hours beyond 8 in a day that a state law requires, but the FLSA doesn't, is not qualified overtime.

Is overtime still taxed for Social Security?

Yes. The deduction lowers federal income tax only. Overtime is still wages for withholding and Social Security.

What if my W-2 doesn't show code TT?

Ask your employer for a Form W-2c. For 2026 the IRS does not let you deduct overtime that isn't reported in box 12 code TT.

Can I take no tax on tips and no tax on overtime at the same time?

Yes. They are separate parts of Schedule 1-A with separate caps. Read no tax on tips for the tips rules.

Does double time count?

Only the half-time premium the FLSA requires. The rest of the double-time pay is taxed normally.

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