"No tax on overtime" became law in July 2025 — and it's already one of the most misunderstood provisions in the tax code. Frederick County nurses, factory workers, technicians, and first responders logging overtime can now deduct part of that pay federally. But only part, only through 2028, and — as with tips — Maryland hasn't conformed. Here's how it actually works.
The One Big Beautiful Bill Act created a new above-the-line federal deduction for qualified overtime compensation — available for tax years 2025 through 2028. Eligible workers can deduct up to $12,500 per year ($25,000 for married couples filing jointly) of qualifying overtime pay from their federal taxable income. Because it's above-the-line, you get it whether you itemize or take the standard deduction.
The name oversells it, though. The deduction does not make your overtime check tax-free: your employer still withholds normally all year, payroll taxes still apply in full, and — critically — only a specific slice of your overtime pay qualifies. For the full picture of the 2025 law, see our complete OBBBA guide.
Key details: effective tax years 2025 through 2028. Above-the-line deduction, capped at $12,500 ($25,000 joint). Phases out above $150,000 modified AGI ($300,000 joint). Requires a valid Social Security number, and married taxpayers must file jointly — married filing separately is excluded. Claimed on the new Schedule 1-A of Form 1040.
The deduction applies only to the premium portion of overtime required by the federal Fair Labor Standards Act — the "half" in time-and-a-half. Your regular rate for those hours was always taxable and stays taxable.
| Example: $20/Hour Worker, One Overtime Hour | Amount | Deductible? |
|---|---|---|
| Regular rate portion of the overtime hour | $20 | No — ordinary wages |
| FLSA overtime premium (the "half") | $10 | Yes — qualified overtime compensation |
| Total paid for the hour | $30 | Only $10 of it |
Scaled up: a worker earning $20/hour who logs 10 overtime hours every week has $100/week of deductible premium — about $5,200 per year. At a 22% federal bracket, that's roughly $1,150 in annual federal tax savings. Real money, but far less than "no tax on overtime" suggests, and workers who plan around the headline get disappointed at filing time.
Qualifies: the premium on overtime that federal law (FLSA Section 7) actually requires — generally time-and-a-half for hours over 40 in a workweek, paid to non-exempt workers. Maryland's overtime law mirrors the federal 40-hour threshold for most workers, so the overtime most Frederick County hourly employees earn is FLSA-qualified.
Does not qualify:
Just like the tips deduction, Maryland has not conformed to the overtime deduction. The premium pay you deduct federally remains fully taxable on your Maryland return — state tax plus Frederick County local tax, exactly as before. Maryland's General Assembly would need to pass conforming legislation, and as of early 2026 it has not. For the full list of places the two systems split, see our Maryland vs. federal tax differences guide.
Do not reduce your Maryland withholding based on this deduction. The federal deduction changes nothing on the Maryland side — cutting your Maryland withholding in anticipation of savings that only exist federally produces a Maryland balance due, and potentially an underpayment penalty, at filing time. If you adjust anything, adjust federal withholding only.
Here's the practical wrinkle for this filing season. For tax year 2025, employers were not required to separately report qualified overtime on the W-2 — the IRS designated it a transition year with penalty relief. Some employers volunteered the number in Box 14; many didn't. If yours didn't, the IRS's guidance allows you to calculate the qualified premium from pay stubs and payroll records using reasonable methods — which is exactly the kind of reconstruction we handle during preparation.
For tax year 2026, reporting becomes standardized: employers report qualified overtime compensation in W-2 Box 12 under new code TT, making the deduction straightforward to claim going forward. Either way, the deduction itself is claimed on Schedule 1-A with your Form 1040.
If your payroll setup needs a review — or your business also deals with tipped staff, where the interlocking rules get genuinely complicated — our small business tax team handles both sides.
The overtime and tips deductions are independent — separate caps, separate rules, and claiming one doesn't reduce the other. A Frederick restaurant server who works 45-hour weeks can potentially deduct the FLSA overtime premium on hours over 40 and up to $25,000 of qualified tips on the same return. One boundary to know: tips received during overtime hours count toward the tips deduction, not the overtime one — the categories don't double-dip. Our companion guide covers the tips side: No Tax on Tips: What Frederick County Workers and Employers Need to Know.
We'll calculate your qualified overtime from your pay records — even without a W-2 breakdown — claim it correctly on Schedule 1-A, and keep your Maryland side squared away. Call (301) 662-6992.
Book a ConsultationYes. For 2025, employers weren't required to break out qualified overtime, and the IRS allows you to calculate the deductible premium from pay stubs, year-end payroll summaries, or an employer statement using its published reasonable methods. Keep the records you relied on — the IRS requires documentation supporting the number you claim.
Only if you're non-exempt under the FLSA — meaning you're legally entitled to overtime despite being salaried, which applies to some lower-salary positions. Exempt salaried employees have no FLSA-required overtime, so there's no qualified overtime compensation to deduct, even if your employer pays extra for long weeks.
No — only the 0.5x premium the FLSA requires for hours over 40 qualifies. The portion above time-and-a-half is employer generosity, taxed as ordinary wages. Similarly, overtime premiums triggered by a union contract or company policy before you hit 40 hours in a week don't qualify at all.
No — withholding doesn't change, and payroll taxes (Social Security and Medicare) still come out of every overtime dollar. The benefit arrives when you file, as a deduction that lowers your federal taxable income. If you want to feel it during the year, the IRS withholding estimator can help you adjust your federal W-4 — but leave your Maryland withholding alone, since Maryland still taxes the full amount.
By Roy Cogliandolo, CPA · Mercer Flanagan · April 20, 2026
This article is general information, not tax or legal advice. Caps, phaseouts, and reporting requirements are subject to IRS guidance and change — verify your specific situation with a qualified professional before acting.