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If you earned overtime in 2025, you could see an even larger refund in the 2026 filing season based on new tax cuts enacted by President Donald Trump’s “Big and Beautiful Bill.”
But experts say missing details on tax forms like W-2s from employers could lead to confusion when filing taxes this year.
The “overtime tax-free” deduction allows certain workers to deduct up to $12,500 annually from 2025 to 2028 for single filers and up to $25,000 for married couples filing jointly. The tax breaks phase out or begin to diminish once income exceeds $150,000 for single filers and $300,000 for joint filers.
In 2025, employers do not need to separate overtime pay from regular pay on Form W-2, 1099-NEC, or 1099-MISC. That means you’ll have to calculate the extra time you’re eligible for yourself during the 2026 season.
“The Treasury Department gave employers a one-year grace period[to report],” said Mika Siegel, a certified financial planner and founder of TaxCentric, an advisory firm in Fair Lawn, New Jersey. “But it would be very difficult for taxpayers.”
As a result, many workers will need to use pay stubs to calculate overtime deductions in 2025, said Siegel, who is also a certified public accountant.
Who is eligible for the “overtime pay tax exemption” deduction?
The “overtime tax-free” deduction applies to non-exempt workers with income covered by the Fair Labor Standards Act (FLSA). This law generally includes workers who must receive at least 1.5 times their normal pay for working more than 40 hours a week.
However, according to the IRS, this definition does not include some workers who are subject to state or labor contract obligations.
Only the portion over your regular wage can be deducted from your overtime pay. For example, if your overtime pay is 1.5 times the normal amount, you can deduct half of it up to the annual limit.
How to calculate the deduction amount for “overtime pay tax exempt”
Overtime deductions in 2025 could be difficult to figure out if the details aren’t reported separately on tax returns this season, experts say.
Some employers report numbers in box 14 of the W-2, “but only the good ones,” Siegel says.
If this number doesn’t appear on your W-2, you’ll need to check your company’s payroll software or pay stub to see your overtime totals. This is the starting point for calculating your deduction.
In some cases, “overtime pay” may be listed on your pay slip or payroll software in addition to your regular remuneration.
Other employers may only report year-end lump sum payments based on overtime pay, but that requires some calculations, according to the IRS. The calculation is as follows:
If it is 1.5 times the regular salary, divide the lump sum by 3. If it is 2.0 times the regular salary, divide the lump sum by 4.
“Starting with your year-end pay stub can really, really help,” said Tom Oseven, director of tax content and government relations at the National Association of Tax Professionals.
Regardless of the overtime deduction, Oseven said it’s important to save any documentation that supports your tax deduction on your return in case the IRS asks you questions later.
