How much overtime is tax free
None of it is tax free. A capped amount of the premium is deductible, and the cap is reached sooner than most people expect.
The cap in hours
Because only the premium counts, $12,500 of deduction represents a great deal of overtime. At $25.00 an hour the premium is $12.50 an hour, so the cap arrives after 1,000 overtime hours in the year, around 20 hours every week.
| Regular rate | Premium an hour | Hours to reach $12,500 | Per week | Hours to reach $25,000 |
|---|---|---|---|---|
| $15.00 | $7.50 | 1,667 | 32.1 | 3,333 |
| $20.00 | $10.00 | 1,250 | 24.0 | 2,500 |
| $25.00 | $12.50 | 1,000 | 19.2 | 2,000 |
| $30.00 | $15.00 | 833 | 16.0 | 1,667 |
| $35.00 | $17.50 | 714 | 13.7 | 1,429 |
| $45.00 | $22.50 | 556 | 10.7 | 1,111 |
Below those hours, every qualifying dollar counts. Above them, extra overtime still earns you money but adds nothing further to the deduction.
Why "tax free" is the wrong word
Three things keep overtime taxable even when the deduction applies in full. Social Security and Medicare are charged on the whole amount. State income tax is usually charged on the whole amount too, since most states do not follow this federal deduction. And the federal saving is your marginal rate on the deducted amount rather than the amount itself.
On $12,500 of deduction at the 22% bracket, the federal saving is $2,750 while FICA of roughly $956 on that same pay stays withheld.
The joint cap is genuinely double
The overtime cap goes from $12,500 to $25,000 on a joint return, and it belongs to the return rather than to each spouse, so two people with heavy overtime share one $25,000 ceiling. The tips deduction behaves differently: its $25,000 cap is not doubled by filing jointly.
Common questions
- How much overtime is tax free in 2026?
- None of it is tax free. Up to $12,500 of the premium portion is deductible, or $25,000 on a joint return, and only against federal income tax.
- How many overtime hours does the cap represent?
- Divide $12,500 by half your regular rate. At $20 an hour that is 1,250 overtime hours a year; at $40 an hour it is 625.
- Does the cap rise each year?
- No. There is no inflation adjustment, so it stays at $12,500 and $25,000 through 2028.
- Is the joint cap per person?
- No, per return. Two spouses with qualifying overtime share the single $25,000 limit.