Methodology: No Tax on Overtime Calculator
What this calculator gives you
This calculator estimates the federal income-tax savings from the qualified overtime deduction under IRC §225. You enter filing status, regular hourly rate, FLSA overtime hours, weeks worked, and MAGI. The calculator estimates the qualifying overtime premium, the deduction after caps and phase-out, the marginal federal bracket, and the approximate tax savings.
It also shows the W-2 Box 12 code TT amount: the qualifying overtime premium before the taxpayer-level cap or phase-out.
The basic method
The deduction applies to the FLSA overtime premium, not the whole overtime paycheck. For a flat hourly worker, that premium is the extra half-time piece.
overtime premium per hour = hourly rate x 0.5
annual qualifying premium = overtime premium per hour x overtime hours per week x weeks worked
capped amount = lower of annual qualifying premium or the filing-status cap
phase-out reduction = 10% of MAGI above the filing-status threshold
effective deduction = capped amount minus phase-out reduction
estimated tax savings = effective deduction x estimated marginal federal rate
For 2026, the cap is $12,500 for single filers and $25,000 for joint filers. The phase-out starts at $150,000 MAGI for single filers and $300,000 for joint filers.
Worked examples
| Filing status | Rate | OT/week | MAGI | Effective deduction | Estimated savings | What limits it |
|---|---|---|---|---|---|---|
| Single | $25 | 5 | $70,000 | $3,250 | $715 | Full deduction. |
| Single | $50 | 10 | $90,000 | $12,500 | $2,750 | Cap. |
| Joint | $40 | 8 | $180,000 | $8,320 | $1,830 | Full deduction. |
| Single | $25 | 5 | $170,000 | $1,250 | $300 | Phase-out. |
| Single | $25 | 5 | $200,000 | $0 | $0 | Fully phased out. |
| Joint | $30 | 10 | $450,000 | $0 | $0 | Fully phased out. |
The savings number is an estimate. It uses the 2026 standard deduction and bracket tables to approximate the marginal federal rate.
What counts as qualifying overtime
The input should include overtime required under FLSA §7: usually hours over 40 in a workweek for a non-exempt employee.
Do not include state-only daily overtime, double-time, 7th-day premiums, contract premiums, exempt-employee policy overtime, or other premium pay that is not required by FLSA §7. Those amounts may be real wages, but they do not fit this deduction's qualifying-overtime definition.
What is modeled
- IRC §225's qualifying overtime premium.
- The single and joint filing-status caps.
- The MAGI phase-out.
- 2026 federal standard deductions and tax brackets.
- Approximate federal income-tax savings.
- W-2 Box 12 code TT reporting amount for 2026 and later years.
Married-filing-separately taxpayers are not modeled because the statute disqualifies them from the deduction.
What is not modeled
- State income tax. Most states do not automatically pick up the federal deduction because it reduces federal taxable income, not AGI. State conformity is still evolving.
- FICA. Social Security and Medicare still apply to overtime wages. The deduction is federal income tax only.
- Blended regular rate. Multi-rate workers, bonuses, commissions, shift differentials, and piece-rate pay can change the FLSA overtime premium. Use a blended-rate calculation before using this estimator.
- Retroactive overtime timing. IRS guidance is still developing for some retroactive-pay scenarios. The calculator uses a practical estimator approach.
- No Tax on Tips stacking. Qualified tips use a separate deduction under IRC §224. This calculator handles overtime only.
- Prepared-return precision. Itemizers, QBI claimants, filers near bracket edges, and taxpayers with major adjustments may see a different final savings amount.
When this gets re-reviewed
This methodology is rechecked when IRS bracket tables update, IRS guidance changes the reporting or calculation mechanics, Congress changes IRC §225, the sunset is extended or modified, or state conformity guidance becomes stable enough to model.
Open questions to watch include retroactive overtime timing and how employers should report edge cases involving blended regular rates.
Data sources
- 26 U.S.C. §225 — qualified overtime deduction.
- IRS Rev. Proc. 2025-32 and IRS IR-2025-103 — 2026 brackets and standard deductions.
- IRS Notice 2025-69 — transition and reporting guidance.
- IRS qualified overtime Q&A — taxpayer-facing guidance.
- 2026 General Instructions for Forms W-2 and W-3 — code TT reporting.
Companion guide: No Tax on Overtime.
How accurate is this?
For a flat-hourly employee with straightforward FLSA overtime, the calculator gives a useful federal-income-tax estimate. It is less precise for taxpayers with blended regular rates, complicated returns, state conformity questions, or income near bracket boundaries.
Use it to understand the order of magnitude. Use payroll records and a prepared tax return for the final number.
Frequently asked questions
Why is the marginal rate computed from MAGI - standard deduction?
Because that approximates taxable income, and the marginal rate that applies to the last dollar of the QOC deduction is the bracket at taxable income. Real taxable income involves other adjustments, the QBI deduction, and any itemized deductions — but for most hourly-team workers MAGI minus the standard deduction is within a few percent of the actual figure. Accuracy here doesn't move the savings number much: the single 22% bracket runs from about $50k to $106k of taxable income, so being off by a couple thousand dollars usually doesn't change the bracket.
Why is the cap shown separately from the phase-out?
They're sequential checks under IRC § 225(b). First the deduction is capped at $12,500 single / $25,000 joint (cap on QOC received), then the result is reduced by $100 per $1,000 of MAGI over the threshold. Stepping through them separately in the math view shows the user which constraint is binding for their situation — a high-OT worker might be cap-bound; a high-MAGI worker might be phase-out-bound.
Why is the W-2 Box 12 amount uncapped?
Because the cap applies to what the employee CAN DEDUCT on their 1040, not what the employer must REPORT on the W-2. The employer reports the full FLSA-premium amount in Box 12 code TT regardless of the employee's personal cap. The employee's 1040 caps it from there. We surface both numbers to keep the distinction visible.
Why doesn't the calculator factor in state income tax?
State treatment is not a simple rolling-vs-static conformity question because § 225 reduces taxable income, not AGI. Modeling it well requires state-specific guidance and a state input. For v1 we surface the federal-only number with a clear disclaimer.
How accurate is the savings estimate?
Accurate enough for orientation and worked-example purposes — typically within 10–15% of the actual savings on a fully-prepared return. Sources of error: the standard-deduction approximation for taxable income, the simplification that the entire deduction falls in a single marginal bracket (in reality it may straddle two brackets near the boundary), and the exclusion of other deductions or credits. For specific tax-planning decisions, run the calculation against a real prepared return.
Why are these the 2026 brackets and not 2025?
Because tax year 2026 is the first year with mandatory W-2 Box 12 code TT reporting, and the calculator is primarily an aid for the 2026 return filed in early 2027. The 2025 deduction works mechanically the same way at slightly different bracket levels (Rev. Proc. 2024-40). The savings would differ by a couple of percentage points; the math shape is identical.
About Clockspot
Clockspot helps small businesses track employee time and keep payroll-ready records. Used in all 50 states since 2007, we focus on getting time and pay right — including the wage-and-hour rules that shape both.
Separating FLSA-premium overtime from state daily overtime, double-time, and CBA premiums is what makes W-2 Box 12 code TT reporting accurate. Clockspot helps keep overtime records organized so payroll can review the right number. See how Clockspot tracks overtime.