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No tax on overtime: which dollars actually count

Not every overtime dollar is deductible. Here's which part counts, with the exact arithmetic for double time, comp time, work periods and hospital shifts.

Updated · 6 min read

The rule in one picture

Overtime is normally paid at time-and-a-half: your regular rate for the extra hours, plus a half-rate premium. The deduction covers only that premium, the half your employer was required to pay.

  • Regular rate for those hours$10,000doesn't count
  • Required half-rate premium$5,000counts
A $15,000 overtime payment at 1.5×, drawn to scale.

That's the law's definition: only the amount required by section 7 of the FLSA that is in excess of the regular rate qualifies. Sources: 26 U.S.C. § 225(c)(1), IRS Publication 6133 (PDF). Your pay stub may show it as one overtime line; the split is arithmetic, not a separate line.

What counts, by payment

Find what your pay shows, then take the matching share. Every row finds the same thing: the half your employer had to pay.

  • The premium on its own

    Calculator option: Premium only

    All of it

  • The total, paid at 1.5×

    Calculator option: Total at 1.5×

    ÷ 3 · one third

  • The total, paid at 2× (double time)

    Calculator option: Total at 2×

    ÷ 4 · one quarter

Paid at time-and-a-half, these are also ÷ 3:

  • Comp time paid as wages
  • Work-period overtime (police, fire)
  • Hospital hours on an 8/80 agreement

Double time

Double time pays twice your regular rate. The law only ever requires time-and-a-half, so double time does not double the deduction: only the required half counts, and the rest stays ordinary wages.

  • Regular rate for those hours$10,000doesn't count
  • Required half-rate premium$5,000counts
  • Extra premium your employer chose to pay$5,000doesn't count
A $20,000 double-time payment, drawn to scale.
When an employer pays more than the FLSA requires, for example “double time” pay, only the amount minimally necessary to satisfy 29 USC § 207 is qualified overtime compensation. IRS FS-2026-13 (PDF), question 16.
IRS example · Brad, paid at double time
Paid at 2×$20,000
Divide by4
Counts$5,000

Source: IRS Notice 2025-69 (PDF), Example 4 · Try it in the calculator →

Comp time

Some state and local government employers pay overtime as paid time off instead of cash: 1.5 hours of leave for each overtime hour, allowed by 29 U.S.C. § 207(o). It counts only when you're paid for it.

Doesn't count: You earn comp time

1.5 hours of paid leave for each overtime hour. Not counted yet.

Counts: You're paid for it

Wages for leave you take, or a cash-out when you leave. What counts: the amount paid ÷ 3.

This applies to state and local government employers, not private companies or federal employees. Source: IRS FS-2026-13 (PDF), question 18.

IRS example · Diane, paid for comp time
Paid for comp time$4,500
Divide by3
Counts$1,500

Source: IRS Notice 2025-69 (PDF), Example 6 · Try it in the calculator →

Work periods and 8/80

Most overtime is counted week by week. The FLSA allows two other methods, and the IRS treats both the same way: what counts is the premium your pay rule requires above your regular rate. Source: IRS FS-2026-13 (PDF), question 17.

Work-period overtime (police, fire)

Police officers, firefighters and certain other public employees can be paid overtime on a work period, often 14 days, instead of a 40-hour week. The IRS describes 29 U.S.C. § 207(k) as allowing overtime to be based on a work period longer than a standard 40-hour workweek. Source: IRS Notice 2025-69 (PDF).

Standard: each week checked on its own

Work period (§ 207(k)): the whole period checked together

Each square is a day. Under a work-period rule, overtime is measured across the whole period instead of week by week. Either way, only the required premium counts.
IRS example · Carol, 14-day work period
Overtime paid$15,000
Divide by3
Counts$5,000

Source: IRS Notice 2025-69 (PDF), Example 5 · Try it in the calculator →

Hospital hours: the 8/80 agreement

Hospitals and some residential care facilities can agree with staff to count overtime like this (29 U.S.C. § 207(j), described in IRS Notice 2025-69 (PDF)):

8 h

More than 8 hours in one day

or

80 h

More than 80 hours in a 14-day period

Whichever gives the greater number of overtime hours

Again, only the premium your employer was required to pay counts: the premium actually paid under that rule, not a calculation of the usual 40-hour week. Source: IRS FS-2026-13 (PDF), question 17. There is no 8/80 worked example in the IRS guidance; paid at time-and-a-half, the arithmetic is one third, like any 1.5× payment.

What doesn't count

  • Doesn't count: A premium your employer adds on its own: a weekend or holiday rate, or anything beyond the FLSA minimum
  • Doesn't count: A state-law or union-contract overtime premium
  • Doesn't count: Comp time you've earned but not been paid for yet
  • Counts: What does count: the half your employer was required to pay

The 8/80 agreement is different: there the daily rule is the FLSA's own requirement, so those hours do count. Sources: IRS FS-2026-13 (PDF), questions 16 and 18; IRS Publication 6133 (PDF).

Your W-2

Tax year 2025

Use your own pay records

Under the transition relief in Notice 2025-69, your W-2 may show no separate entry, even if you earned qualified overtime.

Tax year 2026 onward

Box 12, code TT

Enter the full figure on Schedule 1-A, which applies the cap ($12,500, or $25,000 jointly) and the phase-out. You can't claim more than it shows.

Sources: IRS FS-2026-13 (PDF), questions 10, 19 and 20; IRS W-2 instructions (PDF).

What still applies

  • Federal income taxReduced by the deduction
  • Social Security and MedicareStill taken from these wages
  • State income taxDepends on your state

Sources: IRS Publication 6133 (PDF); IRS withholding guidance for 2025.

Sources (6)