IRS clarifies overtime tax deduction as 29 million claim $3,100 average

The IRS updated its "no tax on overtime" guidance, requiring employers to report eligible amounts in W-2 box 12 for 2026 after 29 million filers claimed an average $3,100 deduction on 2025 returns.

"'No tax on overtime' can fit on a bumper sticker, but all of the terms and conditions that apply naturally led to lots of questions from workers and employers about what kind of overtime is eligible and what kind of reporting is required of employers," said Andrew Lautz, senior director of federal policy at the Tax Foundation, a nonpartisan research group.

The updated FAQs clarify that only the overtime premium — the extra half of the 1.5x rate mandated by the Fair Labor Standards Act — counts toward the deduction, capped at $12,500 for single filers and $25,000 for married couples filing jointly. The deduction phases out at $150,000 in modified adjusted gross income for single taxpayers and $300,000 for joint returns. For tax year 2025, the Treasury and IRS waived employer reporting requirements because systems weren't in place, forcing workers to calculate their own eligible amounts from pay stubs.

The shift to employer reporting for 2026 means workers no longer need to self-calculate, but they should verify the W-2 figure is accurate. If the employer-reported amount is wrong, the worker must request a corrected W-2 — they cannot adjust the figure themselves on their return.

Only the overtime premium counts toward the deduction

The deduction applies to overtime pay covered under the FLSA, which requires non-exempt employees to receive at least 1.5 times their normal pay rate for hours worked beyond 40 per week. If a covered worker's regular hourly rate is $40 and their overtime rate is $60, only the $20 premium — the amount above the regular rate — counts toward the deduction.

The IRS FAQs also clarify that if state law or union agreements require overtime pay different from the FLSA, only the portion mandated under the FLSA qualifies. Independent contractors receiving a 1099-MISC or 1099-NEC with eligible overtime pay would be rare, according to the IRS.

For 2025, the average deduction of $3,100 translated to a $682 tax cut for a filer in the 22 percent bracket and $372 in the 12 percent bracket. Treasury data showed 75 percent of filers claiming the deduction had income under $100,000, and 96 percent had income under $200,000. The deduction is one of four new breaks created by the One Big Beautiful Bill Act, alongside deductions for tip income, auto loan interest, and an enhanced senior deduction — all in effect for tax years 2025 through 2028.

Taxpayers should verify their 2026 W-2

Even with employer reporting, workers should double-check the amount reported in box 12 with code TT. "I'm going to ask my clients to still bring those pay stubs, and let's spend a few minutes to check that number and see if it's accurate," said Tom O'Saben, director of tax content and government relations for the National Association of Tax Professionals.

If the amount is incorrect, the worker must request a corrected W-2 from their employer. "If you see a mistake, you can't say 'oh I'm going to correct that myself' and claim a different deduction amount," Lautz said.

The IRS has also warned taxpayers to guard against dishonest tax preparers advertising "expert" help to claim the tip and overtime deductions, charging excessive fees and inflating deduction amounts without proper documentation. Common tactics include guaranteeing eligibility and promising unusually large refunds related to tip income or overtime.

This article is for informational reference only and does not constitute professional advice. Tax rules and figures cited reflect guidance as of August 2026; readers should verify against the latest IRS announcements.