No Tax on Overtime: What Contractors and Their Crews Need to Know
Workers can deduct up to $12,500 of qualified overtime pay ($25,000 joint) through 2028. What counts, the phase-out, and the W-2 code TT employers report.
By Seayora Editorial Team · Published · Facts checked · 2 min read
Short answer: Employees can deduct up to $12,500 a year of qualified overtime compensation, or $25,000 on a joint return, for tax years 2025 through 2028. Only the premium half of time-and-a-half overtime required by the Fair Labor Standards Act counts, and the deduction phases out above $150,000 of modified adjusted gross income ($300,000 joint). Starting with 2026 wages, employers must report qualified overtime on Form W-2 in box 12 with code TT. The deduction does not reduce Social Security or Medicare taxes.
Key takeaways
- Up to $12,500 a year ($25,000 joint), whether or not the worker itemizes.
- Only the FLSA-required premium counts: the extra half of time-and-a-half.
- Phases out above $150,000 MAGI ($300,000 joint).
- For 2026 wages, employers report it in W-2 box 12, code TT.
Who can take the overtime deduction?
Employees who receive qualified overtime compensation, for tax years 2025 through 2028. The maximum is $12,500 a year, or $25,000 if filing jointly; the deduction phases out when modified adjusted gross income is over $150,000, or $300,000 for joint filers; a valid Social Security number is required; married taxpayers must file jointly; and it is available whether or not you itemize (IRS). It is claimed on the new Schedule 1-A.
Which overtime pay counts?
Only overtime required by section 7 of the Fair Labor Standards Act, generally hours over 40 in a workweek, and only the premium portion. If a technician earns $30 an hour and $45 for overtime hours, the qualified amount is the extra $15 for each overtime hour, not the full $45 (IRS Q&A). Overtime paid only because of a union contract or state law, such as daily overtime after eight hours, does not qualify unless it is also FLSA overtime.
What must a contracting business report?
Beginning with tax year 2026, employers must report qualified overtime compensation separately on Form W-2, in box 12 using code TT, and employees generally may claim the deduction only for amounts reported there. For 2025, separate reporting was not required (IRS Fact Sheet 2026-13). That means payroll has to track the premium portion of FLSA overtime separately for each worker during 2026, not just total overtime pay.
Do 1099 subcontractors get the deduction?
Only overtime that the FLSA requires an employer to pay counts, and independent contractors are not owed FLSA overtime, so a subcontractor paid on a 1099 generally has no qualified overtime. Misclassifying employees as contractors creates this and many other problems; see employee or contractor.
Frequently asked questions
How much overtime can I deduct?
Up to $12,500 of qualified overtime compensation a year, or $25,000 on a joint return, reduced once modified adjusted gross income passes $150,000 ($300,000 joint).
Does the whole overtime check count?
No. Only the premium portion of FLSA-required overtime counts, such as the extra half in time-and-a-half.
Where does the overtime amount appear on a W-2?
Starting with 2026 wages, in box 12 with code TT. For 2025, employers were not required to report it separately.
Sources
- What to know about the No Tax on Overtime deduction, Internal Revenue Service
- Questions and answers about the new deduction for qualified overtime compensation, Internal Revenue Service
- Fact Sheet 2026-13, updated questions and answers on qualified overtime compensation, Internal Revenue Service
How Seayora helps
Technician timesheets: Track regular and overtime hours for each technician, week by week.
This article is general information, not tax advice. Tax rules change and your situation is your own, so confirm the treatment with a CPA or enrolled agent before you file.
How we write and check these guides: editorial standards.
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