Guide ยท tax year 2026
No tax on overtime: how it really works
From 2025 through 2028 you can deduct part of your overtime pay from federal taxable income. It is a real saving, but it is not all of your overtime and it is not all taxes.
Figures checked against official sources on October 11, 2026.
What you can deduct
Only the premium part of overtime: the extra pay above your regular rate. If you earn $28 an hour and overtime pays $42, the premium is $14 for each overtime hour. The other $28 is taxed as usual.
- Limit: $12,500 of premium pay a year, or $25,000 on a joint return.
- Income limit: the deduction shrinks by $100 for every $1,000 of income above $150,000 ($300,000 joint).
- Which overtime: overtime that federal law requires, which for most hourly workers means hours over 40 in a week.
- Not available to married people who file separately.
What it does not cover
Social Security and Medicare (7.65%) still apply to all overtime pay.
What about state income tax?
It depends on the state. Arizona, Idaho, Indiana (2026 only), Iowa, Michigan, Montana, North Dakota and Oregon also take the federal deductions for tips and overtime off state taxable income. Colorado follows the tips deduction but taxes overtime in full. Georgia excludes up to $1,750 of tips and up to $1,750 of overtime premium pay. Alabama lets you deduct up to $1,000 of overtime premium pay. Every other state with an income tax still taxes tips and overtime in full. The calculator applies each state's rule.
A worked example
Someone earning $28 an hour who works 8 hours of overtime every week earns $75,712 a year, of which $5,824 is overtime premium. Deducting it lowers federal income tax from $7,827 to $6,545: a saving of $1,281 for the year.
Will I see it in my paycheck?
The deduction is claimed on your tax return. Your paycheck changes only if your withholding does, for example if you enter the expected deduction in Step 4(b) of a new W-4. Otherwise the saving arrives as a larger refund.
Questions
Is overtime tax free in 2026?
No. Up to $12,500 of overtime premium pay ($25,000 joint) can be deducted from federal taxable income. Social Security and Medicare still apply, and so does state income tax in most states.
Which states do not tax overtime?
Arizona, Idaho, Indiana (2026 only), Iowa, Michigan, Montana, North Dakota and Oregon also take the federal deductions for tips and overtime off state taxable income. Colorado follows the tips deduction but taxes overtime in full. Georgia excludes up to $1,750 of tips and up to $1,750 of overtime premium pay. Alabama lets you deduct up to $1,000 of overtime premium pay. Every other state with an income tax still taxes tips and overtime in full.
How long does the overtime deduction last?
It applies to tax years 2025 through 2028.
Do salaried workers qualify?
Only for overtime pay that federal law requires their employer to pay. Salaried employees who are exempt from overtime rules do not receive qualifying overtime pay.