No Tax on Overtime 2025: Who Qualifies and How to Calculate It

A lot of Michigan workers are about to miss a tax break because their paystub does not spell it out. If you worked overtime in an auto plant, hospital, warehouse, or shop floor job during 2025, you may be able to claim a new federal deduction when you file your 2025 return in 2026. But there is a catch. The no tax on overtime 2025 break does not cover every dollar of overtime pay. It covers only the pay above your regular rate, which is the part the IRS calls qualified overtime compensation. That premium-half rule is where most people will go wrong. Tax laws change frequently, so verify current figures at IRS.gov and michigan.gov/treasury before filing. This guide shows you who qualifies, what math to use, and one Michigan rule that matters more than most workers expect.
What Is the ‘No Tax on Overtime’ Deduction?
The One, Big, Beautiful Bill created a new above-the-line deduction for qualified overtime compensation. In plain English, that means you may be able to subtract certain overtime earnings from your federal taxable income even if you take the standard deduction. For federal tax years 2025 through 2028, the maximum deduction is $12,500 if you file single or $25,000 if you file a joint return. The deduction starts to phase out once modified adjusted gross income goes over $150,000 for single filers or $300,000 for joint filers.
This is not a tax credit, and it does not make every overtime dollar tax-free. It lowers the income the IRS taxes. It also does not change payroll tax withholding rules the way many headline readers assume. The key question is whether the pay qualifies as overtime required by the Fair Labor Standards Act, usually called the FLSA. If it does, you may be able to claim the premium portion on your federal return using Schedule 1-A and the related IRS instructions.
That is why this deduction matters so much during filing season. A worker who logged steady overtime in 2025 may be able to cut taxable income in a real way. A worker who claims the wrong amount could create a problem on the return just as easily.
Who Qualifies – and Who Doesn’t
The people most likely to qualify are hourly or other nonexempt employees who were legally entitled to overtime under the FLSA. That includes many Michigan manufacturing workers, hospital staff, warehouse workers, service technicians, and similar employees who earned time-and-a-half after working more than 40 hours in a workweek. The IRS also says you need a Social Security number valid for employment, and if you are married you generally have to file jointly to claim the deduction.
Just as important, many workers do not qualify. Exempt salaried employees usually do not because they are not entitled to FLSA overtime in the first place. Self-employed workers and most independent contractors do not qualify either because this deduction is tied to FLSA overtime rules, not just the fact that you worked long hours. And if your employer paid you an extra premium under a contract or company policy that went beyond what the FLSA required, only the FLSA-required piece may count.

Usually qualifies

FLSA-covered hourly or nonexempt employees
• Workers paid time-and-a-half or other FLSA-required overtime premium
• Employees with a valid SSN
• Married workers filing jointly

Usually does not qualify

 Exempt salaried managers, administrators, and professionals
• Self-employed workers and most independent contractors
• People paid extra for extra hours but not under FLSA overtime rules
• Married taxpayers filing separately

That last point is why you should look at how your pay was structured, not just how tired you were. Extra hours alone do not create the deduction. The deduction follows the legal overtime premium.
The ‘Premium Half’ Rule: How to Calculate Your Deduction
This is the heart of the article. The deduction does not cover your entire overtime paycheck. It covers only the extra pay above your regular rate. For a standard time-and-a-half worker, that means the deductible piece is the extra 0.5 times your hourly rate for each overtime hour. The straight-time part of those hours is still just regular pay.
The easiest formula is this: overtime hours multiplied by one-half of your regular hourly rate. If you know both numbers, use them. For example, if your regular rate is $28 an hour, the deductible premium for each overtime hour is $14. If you worked 200 overtime hours during 2025, your tentative qualified overtime compensation is $2,800, before you apply the annual cap or any phaseout.
Some workers will not have that clean data. If your 2025 paystub shows only a lump amount for time-and-a-half overtime, the premium piece is often one-third of that total because one-third is the extra half-time premium and two-thirds is the straight-time portion for the extra hours. Special pay plans, public-safety work-period rules, double-time arrangements, and federal employee rules can require different math, so the safest move is to follow the current Schedule 1-A instructions when your payroll setup is unusual.

Premium-half formula
Standard time-and-a-half: qualified overtime deduction = overtime hours x 0.5 x regular hourly rate.
If your paystub only shows total time-and-a-half overtime pay, one-third of that total is often the deductible premium portion.
Do not deduct the entire overtime line unless the IRS instructions for your pay situation specifically support it.

Step-by-Step: Michigan Auto Worker Calculation Example
Here is a realistic example using the kind of job many Southeast Michigan families know well. Say you are a Stellantis assembly worker earning $30 an hour. During 2025, you work 8 overtime hours a week for 50 weeks, which comes to 400 overtime hours. Your time-and-a-half rate is $45 an hour.
Your total pay for those overtime hours is $18,000, because 400 hours multiplied by $45 equals $18,000. But your deduction is not $18,000. The straight-time piece of those same hours is 400 multiplied by $30, which equals $12,000. The premium piece is the extra $15 an hour, or $6,000 total. That $6,000 is the amount that may qualify for the federal deduction if your income is under the phaseout threshold and the other rules are met.
That example shows why so many workers will overstate the deduction if they guess. They see an overtime line on the paystub and assume the whole amount counts. It usually does not. The premium-half rule is not a technical footnote. It is the whole calculation.
2025 W-2 vs. 2026 W-2: What’s Different
The 2025 return is awkward because employers were not required to separately report qualified overtime compensation on Forms W-2, 1099-NEC, or 1099-MISC for tax year 2025. The IRS gave employers transition relief while the new reporting rules were being rolled out. That means many workers will file a 2025 return without seeing a separate overtime figure printed on the year-end tax form.
For 2025, if your employer did not break out the number, the IRS says you can use the methods in Notice 2025-69 and the Schedule 1-A instructions to calculate it from payroll records. For 2026 and later years, the IRS says those information returns will be updated so employers and payers can report qualified overtime compensation separately. In other words, future filing seasons should be cleaner than this one.
That matters now because a missing breakout on your W-2 does not mean you lose the deduction. It means you may have to do the math yourself. The IRS summary page on the no tax on overtime deduction is a good place to start before you prepare the return.
Michigan State Tax: Does It Conform to the Federal Deduction?
This is the part many Michigan workers will not expect. Michigan Treasury says the deduction for qualified overtime compensation is not available on the Michigan return for tax year 2025, even though it is available on the federal return. Under Treasury guidance issued in January 2026, Michigan begins allowing the deduction for tax years 2026, 2027, and 2028, and residents generally deduct the same qualified overtime amount they deducted federally for those years.
So if you are filing a 2025 return in 2026, your federal taxable income may go down while your Michigan taxable income does not. That split is easy to miss if you assume the state return automatically follows the federal one. It does not here. Nonresidents have another wrinkle because only qualifying overtime tied to services performed in Michigan is eligible once the state deduction starts.
Because Treasury has been issuing rolling guidance on these new provisions, it is smart to review the Michigan Treasury notice on qualified overtime and qualified tips before you file or amend anything.
What to Do If Your W-2 Doesn’t Show Overtime Separately
Start with your last paystub of the year, your payroll portal, and any year-end wage summary your employer gave you. Then identify your regular hourly rate, the number of overtime hours you worked, and the overtime rate that was actually paid. If your records are clean, you can usually back into the premium portion with straightforward math.
Ask payroll or human resources whether the company can give you a year-end overtime summary or an earnings statement that separates overtime from regular wages.
Pull your paystubs for all 2025 pay periods and total either the overtime hours or the overtime-pay line items.
Use the Schedule 1-A instructions to calculate only the qualified premium portion, not the full amount labeled overtime.
Keep copies of the records with your tax file in case the IRS asks how you arrived at the number.
If you are claiming the deduction because you are trying to reduce a balance due, compare that benefit with your full tax picture before filing.
If the return still is not clear, get help before you file rather than papering over the gap with a guess. That is especially true if you already owe the IRS and you are hoping this deduction will shrink a 2025 balance. Levy Tax Help’s IRS back taxes team can help you look at the return and the bigger collection picture together.
Frequently Asked Questions
Can I deduct all of my overtime pay on my 2025 federal return?
No. In most cases you can deduct only the part of your overtime pay that is above your regular rate, which is the premium half. For a standard time-and-a-half worker, that is usually the extra 0.5 times the regular hourly rate for each overtime hour.
Do salaried employees qualify for the overtime deduction?
Usually not if they are exempt from FLSA overtime rules. The deduction is aimed at workers who were legally entitled to overtime pay under the FLSA, not workers who simply worked long hours.
What if my employer didn’t list overtime separately on my 2025 W-2?
You may still be able to claim the deduction. The IRS says 2025 is a transition year, so workers can use Schedule 1-A instructions and supporting payroll records to calculate qualified overtime compensation when it was not separately reported.
Does Michigan allow the no tax on overtime deduction for the 2025 tax year?
No. Michigan Treasury says the deduction is not available on the Michigan return for tax year 2025, even though it is available federally. Under current Treasury guidance, Michigan begins allowing the deduction for tax years 2026 through 2028.
Can I still take the deduction if I use the standard deduction?
Yes. The overtime deduction is an above-the-line deduction, so eligible taxpayers can claim it whether they itemize or take the standard deduction.
If you’re trying to claim the no tax on overtime 2025 deduction correctly, the team at Levy Tax Help is ready to help. Our attorneys, CPAs, and former IRS revenue officers understand exactly how wage reporting and tax disputes work – because many of us worked on the IRS side of these cases. Call (877) 500-4930 or contact us online for a free consultation.