The “OT Deduction” Explained
If you’ve seen people saying “overtime is tax free now,” I get why you’re confused. The new OT deduction is real, but it’s not as simple as “all your overtime isn’t taxed.” It’s a deduction you claim on your tax return, and it’s only for a specific slice of overtime pay.
Also, if you’re filing your 2025 taxes right now and you’re not sure what to do with this, you’re not alone. This is brand new, and a lot of employers didn’t break it out neatly yet. (More on that below.)
Here’s the plain-English version.
What the OT deduction actually is: It lets some taxpayers deduct the “premium” part of overtime pay. Think of time-and-a-half.
Your normal pay rate is your “regular rate.” Overtime is often paid at 1.5x your regular rate.
The deductible part is the extra “half” portion, not the whole overtime check.
Quick example: If you normally make $20/hour and overtime is $30/hour, the “premium” is $10/hour. That $10/hour is the part that may qualify for the deduction.
Who can take the OT deduction
In general, you can take it if all of these are true:
You earned overtime that was required under federal overtime rules (FLSA). This is typically overtime for working over 40 hours in a week.
You’re within the income limits (more on that in a second).
You have a Social Security Number on the return.
If you’re married, you file a joint return (married filing separately does not qualify).
The overtime is reported to you on a tax form or statement (like a W-2, 1099, or another official pay statement).
How much you can deduct
There are two big limits:
The yearly cap:
Up to $12,500 max (single) or $25,000 max (married filing jointly).
The income phaseout:
Once your income goes over $150,000 (single) or $300,000 (married filing jointly), the deduction starts shrinking. Eventually it goes away.
What you can deduct (this is the part people miss)
You can deduct the overtime premium only. That’s the “extra” amount above your regular pay rate.
So if your employer paid you time-and-a-half, the deductible piece is usually the “half” portion.
What you cannot deduct
This is where the internet goes off the rails 😅
You can’t deduct your entire overtime pay. Only the premium portion.
You also generally can’t treat these as OT for this deduction just because they feel like OT:
Regular wages (your normal pay is not deductible)
Holiday pay or bonuses (unless they are specifically part of qualified overtime calculations under the rules)
Shift differentials, hazard pay, weekend premiums, double time, etc. if they aren’t part of the FLSA-required overtime premium
Anything called “overtime” that isn’t actually overtime required under federal overtime rules
And one more big one:
This does not get rid of Social Security and Medicare taxes on your overtime. Those still apply.
How do you find the number to use
For tax year 2025 specifically, employers were not required to separately list “qualified overtime” on the W-2. Some did (often in Box 14 or a separate statement), and some didn’t.
So if your W-2 has a special OT amount listed, great, use that.
If it doesn’t, you may need to use your pay stubs or year-end payroll summary to calculate the premium portion using a reasonable method. Most tax software is starting to ask questions to help with this.
If you’re stuck, don’t guess. This is one of those areas where a 10-minute review can save you from a mess later.
As always, consult your tax professional for your specific situation. Don’t have a tax professional?
Get on my calendar for taxes! https://calendly.com/sara-dunhambookkeepingservices
