Definition
The overtime deduction, created by OBBBA in 2025, allows employees to deduct up to $12,500 ($25,000 if married filing jointly) a year of the 'and-a-half' premium part of overtime pay (the extra half in time-and-a-half), if total income is under $150,000 ($300,000 if married filing jointly). It is line 1b of the W-4 Deductions Worksheet. Premium above the cap is taxed as usual. Like the tip exclusion, FICA taxes still apply to all overtime earnings.
The exclusion benefits workers in industries with frequent overtime: manufacturing, healthcare, transportation, construction, and emergency services. For workers who regularly earn overtime, the savings can be substantial — up to $2,750 in annual tax savings at the 22% marginal rate if the full $12,500 premium applies.
This is an above-the-line deduction applied before standard deduction calculations, so it reduces taxable income regardless of whether you itemize.
How this affects your W-4
Enter your estimated annual overtime pay (up to $12,500) in the OBBBA section of the calculator. The calculator caps the exclusion at $12,500 automatically.
For an employee in the 22% bracket with $12,500 of overtime, the full exclusion saves $2,750/year in federal income tax — approximately $106 per biweekly paycheck.
See how overtime exclusion affects your withholding
Use the free W-4 calculator to calculate your exact withholding with your specific situation.
Open the W-4 Calculator →Read the guide
No Tax on Tips and Overtime: What to Put on Your 2026 W-4
Tips and overtime are not fully tax-free. What the deductions cover, a worked example, and the W-4 line to use.
How the 2025 Tax Law (OBBBA) Changes Your 2026 W-4 Withholding
The One Big Beautiful Bill Act (signed 2025) added deductions for tips, overtime, seniors and car loan interest. Here is where each goes on your 2026 W-4.
Related terms
OBBBA Deductions
New deductions, available without itemizing, created by the One Big Beautiful Bill Act (signed in 2025) — for tips, overtime, seniors, and car loan interest — that apply to tax years 2025 to 2028.
Tip Income Exclusion
An OBBBA deduction for up to $25,000 of qualified tips (with income limits), reducing federal income tax but not FICA.
Withholding
Taxes your employer takes out of each paycheck and sends to the IRS and your state before you receive your pay.