Salaried workers get the "no tax on overtime" deduction only if they are non-exempt: it covers only overtime the FLSA requires, so truly exempt employees don't qualify.
The deduction covers only the extra half of time-and-a-half, up to $12,500 a year ($25,000 joint). Salaried non-exempt workers who get overtime qualify. Exempt workers don't, because the FLSA doesn't require their employer to pay them overtime at all. So if you've been misclassified as exempt, you're losing twice: the overtime pay itself, and the tax break that would have come with it.
We're overtime lawyers, not tax advisors. Everything below comes from the IRS's own guidance.1 Take your return to a tax professional.
The One, Big, Beautiful Bill Act2 created an income tax deduction for qualified overtime compensation. The IRS: “The deduction is up to $12,500 of qualified overtime compensation earned for the year per individual tax return ($25,000 in the case of a joint return). The deduction is reduced if a taxpayer's modified adjusted gross income (MAGI) for the tax year exceeds $150,000 ($300,000 for joint filers).” You can take it whether you itemize or not. One IRS notice covered tax year 2025; the 2026 fact sheet covers returns for tax years 2026–2028.3 Married workers must file jointly, and you need a social security number valid for employment.
It's a deduction, not a payroll exemption. The IRS: “Generally, overtime compensation is not excludible or exempted from wages for purposes of employment taxes including income tax withholding, social security, and federal unemployment taxes.”
The IRS formula for a workweek:
Number of FLSA hours worked in excess of 40 hours in a workweek x One-half x Employee's FLSA regular rate of pay = Qualified overtime compensation for workweek
The IRS example: a worker earning $20 an hour works 50 hours and the employer pays double time, $400 for the 10 overtime hours. The FLSA required only $300. The qualified overtime is $100, “the ‘half’ amount in the required one and one-half times.”
Starting with 2026, employers must report it on your W-2 in box 12, code TT.
Being salaried doesn't stop you. The DOL says the FLSA “does not prohibit paying non-exempt employees a salary, as long as the proper overtime premium is also paid.”4 If you're salaried non-exempt, the half-time premium on your FLSA-required overtime is qualified overtime compensation, subject to the cap and phase-out.
The IRS: “Employees who are exempt from the FLSA's overtime requirements are FLSA overtime-ineligible.” And an overtime-ineligible worker “does not receive qualified overtime compensation regardless of other laws or circumstances (such as a collective bargaining agreement) providing for overtime pay.” If your employer voluntarily pays exempt staff something extra for long weeks, that doesn't count.
Here's the trap. If your employer calls you exempt when you're not, it pays you no overtime and reports nothing in box 12, code TT. And for tax years after 2025, the IRS says you can't deduct more than the W-2 shows: “no relief is available for tax years after 2025.” The fix the IRS points to is a corrected W-2 (Form W-2c) from your employer. A substitute W-2 (Form 4852) doesn't work.
So misclassification now costs you two things: the time-and-a-half you were owed and the tax deduction on the half. Whether you're exempt is a question about your salary and duties, not your paperwork. Run the 10-question check.
Some states require overtime the FLSA doesn't, such as daily overtime. The IRS treats overtime paid under state law, a union contract, or company policy the same way: “only the amount minimally necessary to satisfy 29 USC § 207 is qualified overtime compensation for purposes of the tax deduction.” See our state overtime law pages.
The IRS fact sheet1 doesn't address overtime back pay paid years later through a lawsuit or settlement. We don't know yet whether, or in which tax year, that money can be claimed as qualified overtime compensation. What is settled is the ordinary treatment: overtime back pay is wages, reported on Form W-2 and subject to withholding, while liquidated damages are income but not wages and are reported on Form 1099-MISC.10 Don't count on the deduction for a recovery. Ask a tax professional when the money arrives.
If you're salaried, called exempt, and working over 40 hours, the overtime claim comes first. The deduction follows the overtime, not the other way around. Read about salary vs. hourly and the 2026 salary threshold.
Siegel Law Group has recovered more than $100 million for workers in federal overtime cases, including a $38.7 million class and collective settlement in Pruess v. Presbyterian Health Plan,5 where the firm was lead counsel. Past results do not guarantee future outcomes.
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No. Overtime is still subject to income tax withholding and social security. You can file a new Form W-4 to account for the expected deduction.6
Because only the half-time premium on FLSA-required overtime counts. The straight-time part of each overtime hour doesn't.
No. Exempt workers are FLSA overtime-ineligible, so that pay isn't qualified overtime compensation.
Ask your employer for a Form W-2c. Without a corrected W-2, the IRS says you can't use the missing amount, and Form 4852 doesn't fix it.7
Only the part the FLSA itself requires. Overtime owed only under state law isn't qualified overtime compensation.
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Attorney advertising. Jack L. Siegel of Siegel Law Group PLLC, Dallas, Texas, is responsible for this content.
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