How to Calculate Your Overtime Deduction 2025 — Step-by-Step

The No Tax on Overtime deduction created by the One Big Beautiful Bill Act (OBBBA, P.L. 119-21, IRC §225) lets eligible W-2 workers reduce their federal taxable income by the overtime premium they earned. But many workers make a critical mistake: they assume their entire overtime paycheck is deductible. It isn't. Only the half-time premium qualifies.

This guide walks through the formula step by step, shows three real-world examples at different pay rates, explains how double-time works, and tells you exactly where to find your numbers. If you want the math done for you automatically, use our free overtime tax calculator — but read this first so you understand what the numbers mean.

The Formula — Only the 0.5× Premium Counts

Under IRC §225, the deductible amount is defined as the "qualified overtime compensation" — which equals the premium portion of your FLSA overtime pay. Time-and-a-half (1.5×) means you earn your regular rate plus a 0.5× bonus. That 0.5× bonus is the deductible premium. Your regular rate itself is still fully taxable.

The formula has just three inputs: your regular hourly rate (before overtime multiplier), the number of FLSA overtime hours you worked (hours over 40 per week), and nothing else. Once you have your annual deductible premium, you then compare it to the cap and apply any phase-out reduction.

Three Worked Examples at Different Pay Rates

Let's see exactly how the calculation works for three common worker profiles. All three are single filers; we'll note how the cap and bracket affect each one.

Example 1 — Warehouse Worker, $18/hr

At 12%, the warehouse worker saves $432 per year in federal income tax. That's real money — about $36/month extra in a tax refund or reduced withholding. Note that FICA taxes (Social Security and Medicare, totaling 7.65%) still apply to the full overtime pay.

Example 2 — Registered Nurse, $42/hr

The nurse's premium ($12,096) comes very close to the $12,500 single-filer cap. At 22%, the savings are significant — over $220/month in reduced federal tax. Nurses working on standard 12-hour shift schedules often hit or approach the cap, making this deduction especially valuable for healthcare workers. See our dedicated nurses overtime tax guide for more details.

Example 3 — Electrician, $55/hr (Cap Hit)

The electrician's raw premium of $20,625 exceeds the $12,500 cap, so only $12,500 is deductible. At 24%, the tax savings are $3,000 — still substantial, but $2,550 of potential deduction was cut off by the cap. Workers with very high overtime premium amounts should factor in that the cap limits the benefit regardless of how many overtime hours they work above that threshold.

What If You Earn Double-Time?

Some employers pay double-time (2×) for certain shifts — such as holidays, Sundays, or hours beyond 12 in a single day in some states. Double-time overtime also qualifies for the deduction, but the premium calculation is different.

For double-time pay, the premium above your regular rate is 1.0× your regular rate (because 2× minus 1× regular rate = 1×). The deductible premium formula becomes:

Example: You earn $30/hr and work 5 hours at double-time that also push your weekly total over 40. Your deductible premium is $30 × 1.0 × 5 = $150. (Not $300 — the base rate portion is still regular wages.)

If you have a mix of time-and-a-half and double-time hours in the same year, calculate each separately and add the premiums together before applying the annual cap.

How to Find Your Numbers

You need two numbers: your regular hourly rate and your annual FLSA overtime hours. Here's where to find them:

• Regular hourly rate: Found on your offer letter, pay stubs (labeled "Regular Rate" or "Base Rate"), or by dividing your regular pay by regular hours on any pay stub.
• Annual FLSA overtime hours: Add up all overtime hours (hours over 40 per week) from every pay stub during the year. Note: California, Alaska, and Nevada have daily overtime rules, but for this federal deduction, only hours that push your weekly total above 40 count.
• W-2 Box 14 (2025): Employers may voluntarily report your qualified overtime premium in Box 14. Look for a code like "OTP," "OT PREM," or "OBBBA OT." This is the easiest source if your employer reports it.
• W-2 Box 12 Code TT (2026+): Beginning with tax year 2026, employers are required to report your qualified overtime compensation in Box 12 using Code TT. This makes it mandatory, so starting in 2027 when you file your 2026 return, the number will be on your W-2.
• IRS divide-by-3 shortcut: Per IRS Notice 2025-69, for time-and-a-half overtime only, you can approximate the deductible premium by dividing your total overtime pay by 3. (Because OT pay = regular rate × 1.5 × hours, and the premium = rate × 0.5 × hours, the premium is exactly 1/3 of total OT pay.) This works only for straight time-and-a-half — not double-time.

For more detail on reading your W-2 and pay stubs, see our How to Find Overtime on Your W-2 guide.

Apply the Cap and Phase-Out

Once you have your raw deductible premium for the year, you must apply two limiting rules:

Phase-out calculation: The deduction is reduced by $100 for every $1,000 of Modified Adjusted Gross Income (MAGI) above the threshold. For example, a single filer with $175,000 MAGI is $25,000 over the $150,000 threshold, so the deduction is reduced by $2,500 (25 × $100). If their raw premium was $8,000, the final deduction is $5,500.

For full eligibility rules including who qualifies as FLSA non-exempt, see our complete eligibility guide.

Calculate Your Exact Savings Now

You now understand the formula, the cap, and the phase-out rules. The fastest way to get your exact number is to use our free calculator — it handles all the math automatically, including the phase-out calculation, and shows your marginal bracket in real time.

Frequently Asked Questions