How to Find Your “No Tax on Overtime” Deduction Amount

Background

Starting with the 2025 tax year, some workers can take a new federal income tax deduction for overtime pay on their individual tax return. You might hear people call this “no tax on overtime,” but what actually happens is that eligible workers get a deduction on Form 1040. Overtime is still taxed through payroll during the year. The tax break comes later, when the tax payers file their return.

What the overtime deduction actually covers

At a high level, this deduction is about one specific piece of overtime pay: the FLSA overtime premium. In plain language, the deduction generally applies only to the ‘extra half’ (the premium portion) of overtime pay required under federal law (FLSA) when eligible workers work more than 40 hours in a week. It does not necessarily apply to all overtime or bonus pay, especially if the overtime is paid based on state law, a union contract, or employer discretion above what FLSA requires.

Before getting into the how-to, it helps to spell out the basic rules that sit behind all of the math.

Here are the core features of the overtime deduction:

• It applies to tax years 2025 through 2028.
• It is capped at $12,500 per return or $25,000 for a joint return (before income-based phaseouts).
• It generally only applies to FLSA overtime paid to nonexempt employees.
• Extra, voluntary premiums above what FLSA requires usually do not count beyond the portion that represents the FLSA overtime premium.

On the payroll side, nothing fancy is hiding in the background. Overtime is still treated as normal wages. That means in 2025:

• Overtime is still subject to federal income tax withholding.
• Overtime is still subject to Social Security and Medicare taxes.
• Overtime is still reported with other wages in boxes 1, 3 and 5, but will not separately identify the premium wages for 2025. That’s why you’ll need your pay-stub/portal records to compute the deduction. *2026 W-2s will have the premium overtime wages separately identified.

The tax break shows up later, when employees claim the deduction on the individual Form 1040, using the rules from IRS Notice 2025-69  and the Form 1040 instructions.

How to find your overtime tax deduction amount

From the employee perspective, the goal is to figure out how much qualified overtime compensation you received in 2025. Then you compare that number to the annual limits and let your tax software or preparer handle the rest.

The process starts with a simple question: are you even in the ballpark for this deduction?

Step 1: Confirm you are likely eligible

You do not want to spend an hour with a calculator only to realize the deduction does not apply to you. So start by checking whether your situation lines up with the basic requirements.

You are more likely to qualify if:

• You are a W-2 employee.
• You are nonexempt under the FLSA and entitled to overtime for hours over 40 in a workweek.
• Your overtime is paid at 1.5x or 2x your regular rate.
• Your income is under the law’s phaseout thresholds  which is your modified adjusted gross income (MAGI) does not exceed $150,000 (single) / $300,000 (joint)

If you are salaried exempt and never legally entitled to FLSA overtime, your “overtime” payments might not  qualify at this time. The same goes for purely contractual or state-only overtime that does not tie back to FLSA overtime rules.

Step 2: Gather your records

Once you know you might be eligible, the next step is to collect the documents that show how much overtime you actually earned in 2025. You do not need anything exotic, but you do need enough detail to see your total overtime for the year.

Your final 2025 pay stub where you’ll see a separate line for “Overtime” or “Double Time” on your pay stub in year-to-date earnings.  You can also find the YTD overtime total in the employee portal.

• Log into your portal at www.mypatriot.com
• Go to My Info > Pay Checks
• Enter the start date and end dates:  1/1/2025 – 12/31/2025
• Click “Run Report”
• Each pay stub will be displayed, slide down to the bottom of the report to see the totals for all pays listed or print your last pay stub of the year. Either will show the total YTD overtime dollars

Note: Alaska, California, Colorado, and Nevada have daily overtime rules. State and local overtime laws that are stricter than the FLSA overtime are not eligible for the tax deduction. You’ll need to use your time sheets to help you find what hours count toward the Federal overtime amount.

Now,  you can use the methods the IRS describes in Notice 2025-69, which are built around your total overtime dollars.

Step 3: Use your combined overtime totals from pay records

On your pay stub, overtime appears as one combined amount. That single line includes both:

• The base pay for overtime hours
  –and–
• The overtime premium

The IRS guidance lets you use a fraction of that combined overtime total as a shorthand for the FLSA overtime premium, depending on how your overtime rate is set.

A. When your overtime is at time-and-a-half (1.5x)

This is the classic scenario typical of FLSA overtime rules. If both of these are true, you can apply the simplest formula:

1. You are paid overtime at 1.5 times your regular rate
2. Your year-to-date earnings column shows a line for overtime, example:  “Overtime: $X”

In that case, the IRS allows you to treat one third of your total overtime pay for the year as your qualified overtime compensation. This simple method is not for those with bonuses, differentials, fluctuating pay rates or mixed pay rates.

For example:

• Your 2025 year-to-date overtime total is $15,000
• All of that overtime was paid at 1.5x your regular rate
• Your qualified overtime amount is $5,000, because 15,000 ÷ 3 = 5,000

Here is the key detail that people often get wrong: you are dividing the overtime dollars by 3, not the overtime hours.

B. When your overtime is at double time (2x)

Some employers pay certain overtime at double time either because of policy, union contracts, or state rules. The IRS gives a parallel shortcut for that situation.

You can use this shortcut if:

1. You are paid overtime at 2 times your regular rate (Double Time).
2. Your year-to-date records show one combined double time total for the year.

In that case, your qualified overtime compensation is one quarter of your total double time pay for the year.
For example:

• Your 2025 double time total is $20,000 as shown on your pay stub “Double time”
  OR
• All of the overtime was paid at 2x your regular rate.

Your qualified overtime amount is $5,000, because 20,000 × 1/4 = 5,000. Again, the fraction is applied to dollars. Did.

Under federal law, your employer already has to calculate your regular rate each workweek when they figure overtime, including any required bonuses or differentials. When you use the IRS shortcut methods based on your year-to-date overtime totals (like taking 1/3 or 1/4 of combined overtime pay), you don’t need to rebuild that blended regular rate yourself. Those shortcuts are the IRS’s way of letting you work from year-to-date totals instead of recomputing every week’s regular rate.

C. When your overtime is more complicated

Plenty of people live in the messy middle: some overtime at 1.5x, some at 2x, some affected by bonuses that change the regular rate and therefore overtime rates. In those situations, a single fraction on one big number could be wrong in either direction.

If that sounds like you, the IRS still lets you use a “reasonable method” for 2025 that better matches what you actually earned as FLSA overtime premium. The key idea is that you lean on your employer’s records, not guesswork. (In 2026, employers will be required to designate what your FLSA overtime is each payroll — the software will help them with this.)

You can still use a “reasonable method” based on your actual pay records. In practice, most people will:

• Look at their pay stubs or payroll portal and separate overtime totals by rate if they are clearly labeled. For example, put all “Overtime 1.5x” amounts in one bucket and all “Overtime 2x” amounts in another.
• Apply the IRS shortcut fractions to each bucket separately. That means taking one third of the 1.5x overtime bucket and one quarter of the 2x overtime bucket, then adding those results together to get your total qualified overtime amount.

When your pay stub doesn’t clearly show what you earned at each rate, especially with premium overtime, bonuses, differentials, or state-specific overtime rules, the 1/3 or 1/4 shortcut may not be accurate. That is usually the point where it makes sense to hand everything to a tax professional and let them work directly with your employer’s payroll records.

The important part is that you are basing your number on actual payroll and time records, not on a wild guess. If you start to feel like you are doing full blown payroll reconstruction from a kitchen table, that is a good sign to hand the problem to a tax professional and let them drive.

In other words: if the numbers start making your head spin, that is usually your sign to bring in a tax preparer.

Step 4: Apply the annual cap and income limits

Once you have calculated your total qualified overtime compensation for 2025, let your tax software or tax professional apply the income-based phaseout, using your modified adjusted gross income, based on the 2025 Form 1040 instructions. The exact phaseout math will live in the Form 1040 instructions and should be built into reputable consumer tax software.

A quick reminder about the annual cap:

• Up to $12,500 per return, or
• Up to $25,000 if you file a joint return with your spouse.
• Phaseouts are based on modified adjusted gross income (MAGI) $150,000 (single) / $300,000 (joint)

Step 5: Save your records

The IRS expects you to be able to show how you arrived at your deduction. That does not mean you need a legal brief, but you should have the basics ready.

It is a good idea to keep:

• Copies or screenshots of your 2025 pay statements that show overtime totals.
• Any annual payroll summaries you downloaded from your employee portal.
• Any written explanation your employer provided about how overtime is calculated.

Keep this documentation with your other tax records for the usual retention period in case there are questions later.

This is general education, not tax or legal advice. Employees should review the official IRS guidance and talk with a tax professional about their specific situation.

Was this article helpful? *

• Yes
• No

Comments:

Submit

Your feedback will not receive a reply. If you have a specific issue, please reach out to our support team here.