Exactly what portion of overtime pay is exempt — the full 1.5× or just the premium?

Only the overtime premium is exempt — the extra 0.5× above your regular rate. Your regular rate still applies to the base hour (1×), which remains taxable. For example, if your regular rate is $30/hour and your OT rate is $45/hour, only the $15 premium per OT hour is excluded. The $30 base pay on that same hour continues to be taxable income.

Is there an income limit on who can claim the overtime exemption?

The OBBBA sets a dollar cap on the deduction ($10,000 single / $20,000 MFJ) but does not impose a separate income-based phase-out for the overtime exemption as enacted. Workers at any income level can claim the deduction, subject to the dollar cap. IRS may issue additional guidance that further refines eligibility.

Does this apply to salaried workers who receive overtime?

The exemption applies to "qualified overtime compensation" under the FLSA — amounts received for hours in excess of 40 per week at a rate not less than 1.5× the regular rate. This covers both hourly and non-exempt salaried workers who receive FLSA overtime. Salaried workers classified as exempt from FLSA overtime (executives, administrators, professionals earning above the threshold) who receive a flat salary with no separate OT calculation do not have qualifying OT compensation.

What if I hit the $10,000 cap mid-year?

Once your total OT premium for the year exceeds $10,000 (single/HOH) or $20,000 (MFJ), additional OT premium is fully taxable at your ordinary rate. The cap applies to the total deduction for the year, not per pay period. Workers with very high OT hours may hit the cap by mid-year — the remainder of the year they pay full tax on OT.

How do I adjust my W-4 to account for the OT exemption?

Enter the estimated annual OT premium deduction in Step 4(b) of Form W-4 (Other deductions). Your payroll withholding tables will then reduce withholding to account for the deduction, so the savings show up in your regular paychecks rather than as a refund in April 2027. The [OBBBA W-4 Withholding Optimizer](/calculators/obbba-w4-withholding) calculates the exact Step 4(b) amount.

Does the OT exemption stack with the tip exemption?

Yes. If you both work overtime and receive tips in a qualifying tipped occupation, both exemptions apply independently. A restaurant worker who earns tips and also works overtime hours each week can exclude both the tip income and the OT premium from federal taxable income, subject to their respective limits.

Does this change how overtime affects Social Security taxes?

The OBBBA as enacted exempts overtime premium from federal income tax only. FICA taxes (6.2% Social Security + 1.45% Medicare) are levied on wages including overtime pay and are not affected by this exemption. Your gross OT pay continues to count toward your Social Security earnings record.

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OBBBA Overtime Pay Tax Exemption Calculator (2026)

See how much federal income tax you save on overtime pay under the One Big Beautiful Bill Act — 2026 OT exemption up to $10,000/year.

By The FinCalc TeamUpdated May 28, 2026

If you work overtime, you have always paid the same federal income tax on those extra hours as on your regular pay — sometimes pushing you into a higher bracket. The One Big Beautiful Bill Act, signed July 4, 2025 and effective tax year 2026, changes that. The overtime premium — the extra 50% above your regular rate on hours over 40 per week — is now excluded from federal taxable income, up to $10,000 per year (single/HOH) or $20,000 per year (married filing jointly). For a construction worker regularly putting in 10 OT hours per week at $30/hour, that is over $1,500/year back from the federal government.

How the OBBBA Overtime Tax Exemption Works

What Changes in 2026

Prior to 2026, overtime pay was taxed exactly like regular wages — even though overtime hours are often worked under pressure, in less desirable conditions, and at times that displace family or personal time. The OBBBA addresses this by creating an above-the-line deduction for qualified overtime premium compensation.

The deductible amount: the OT premium specifically — the extra 0.5× on top of your base rate.

| Your hourly rate | OT rate (1.5×) | Deductible premium | Taxable portion | |-----------------|----------------|-------------------|----------------| | $20/hour | $30/hour | $10/hour | $20/hour | | $30/hour | $45/hour | $15/hour | $30/hour | | $40/hour | $60/hour | $20/hour | $40/hour |

Cap: Single filers can deduct up to $10,000/year in OT premium. MFJ filers can deduct up to $20,000. The cap limits the benefit for very high OT earners.

Who Hits the Cap?

A $30/hour worker generating a $15/hour OT premium hits the $10,000 cap at approximately 667 OT hours per year — about 13 OT hours per week for 50 weeks. Below that level, the full OT premium is deductible. Above it, the excess is taxable at the ordinary rate.

Impact on Take-Home Pay

The fastest way to see the savings is in your paycheck. Updating your W-4 Step 4(b) with the expected annual OT premium deduction tells your employer's payroll system to withhold less. The tax savings flow through as higher net pay on each check rather than a refund the following April.

Who Should Use This Calculator

If you regularly work overtime in any FLSA-covered position, this calculator tells you your annual federal income tax savings starting in 2026. Construction workers, healthcare workers, truck drivers, factory workers, police and firefighters, and retail employees on overtime schedules are the primary beneficiaries.

If you want to update your W-4 withholding to see the OT savings in every paycheck rather than as a tax refund, use the OBBBA W-4 Withholding Optimizer alongside this calculator.

If you are comparing OBBBA benefits across multiple household members, run separate calculations for each worker — the caps apply per person.

Related Calculators

OBBBA W-4 Withholding Optimizer (2026) — translate the OT exemption into a specific W-4 Step 4(b) entry for paycheck-level savings
OBBBA Tip Income Tax Exemption (2026) — if you also earn tips in a tipped occupation, calculate those savings separately
Solo 401(k) vs SEP-IRA Calculator (2026) — for self-employed contractors who set their own hours, planning retirement contributions alongside the OT deduction maximizes total tax reduction

Understanding the Inputs

Filing Status: Determines your standard deduction, tax brackets, and the OT exemption cap. Single and Head of Household filers are capped at $10,000 in deductible OT premium per year. Married Filing Jointly filers are capped at $20,000 — useful for households where both spouses work overtime-eligible jobs.
Hourly Rate: Your regular straight-time hourly rate before overtime. Under the FLSA, overtime is calculated at 1.5× this rate for hours over 40 per week. The deductible portion is specifically the overtime premium — the extra 0.5× above your regular rate, not the full 1.5× overtime pay. For example, at $30/hour, your OT rate is $45/hour, but only the $15 premium (the 0.5× portion) is excluded from income.
Regular Hours per Week: Your standard scheduled hours per week, typically 40 for full-time workers. Hours at or below this threshold are compensated at your regular rate and are fully taxable — the exemption only applies to hours beyond this threshold.
Overtime Hours per Week: The average number of hours per week you work beyond your regular schedule. If your overtime varies, use a typical average. Construction workers, nurses, truck drivers, police officers, and factory workers commonly work 5–20 hours of OT per week.
Weeks Worked per Year: How many weeks you actually work during the year, including OT weeks. If you take 2 weeks vacation, enter 50. This determines total annual OT hours and whether your OT premium hits the $10,000/$20,000 cap.
Other Income: Any other household income — a spouse's wages, rental income, freelance income, or investment income. This affects your marginal tax bracket and therefore the value of the OT exemption.

Frequently Asked Questions

Related Calculators

OBBBA W-4 Withholding Optimizer

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OBBBA Tip Income Tax Exemption Calculator (2026)

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OBBBA Senior Standard Deduction Calculator (2026)

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The FinCalc Team

Personal Finance Experts

The FinCalc team is a group of personal finance writers, analysts, and engineers dedicated to building accurate, transparent financial calculators. Every formula is verified against industry standards and explained in plain language.

Last reviewed and updated: May 28, 2026