At Haworth & Company, we keep an eye on the latest IRS updates so you don’t have to. The “No Tax on Overtime” provision in the One Big Beautiful Bill (OBBBA) is officially in play, but new IRS guidance shows it’s a bit more complex than the headlines suggest.
Who:
Treasury and IRS
What:
When:
1/23/26
Why Should You Care?
The IRS recently released FAQs to help workers and employers navigate the new Overtime Deduction. Here is what you need to know before you file:
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It’s a Deduction, Not an Exemption: You still pay taxes on your overtime throughout the year. You claim the deduction back when you file your tax return.
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The “Premium” Rule: You only deduct the extra portion of your overtime.
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Example: If you make $20/hr regular pay and $30/hr for overtime, only the $10/hr premium is deductible.
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The Limits: The deduction is capped at $12,500 ($25,000 for joint filers) and begins to phase out if your income (MAGI) exceeds $150,000 ($300,000 for joint filers).
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2026 Reporting: Unlike last year, for the 2026 tax year, employers are now required to separately report this “qualified overtime” on your W-2.
The Bottom Line: This is a great benefit for hourly workers, but the math matters. If you are an employer, make sure your payroll system is updated to track “Qualified Overtime” separately to avoid W-2 corrections later.
Disclaimer: This blog content is for general informational purposes only, should not be considered professional advice, and does not establish a client relationship. Haworth and Company is not liable for the accuracy of this information or the content of external links. Please use this information at your own risk, ensuring it suits your specific needs, and consult with a certified tax professional for your own personalized guidance.