Definition
The overtime exclusion, created by OBBBA 2026, allows employees to exclude up to $12,500 of annual overtime pay from federal income tax. Overtime above $12,500 is fully taxable. 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.
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 →Related terms
OBBBA Deductions
New 2026 above-the-line deductions created by the One Big Beautiful Bill Act — for tips, overtime, seniors, and auto loans.
Tip Income Exclusion
An OBBBA 2026 provision excluding up to $25,000 of tip income from federal income tax.
Withholding
Taxes taken out of each paycheck before you receive it.