How Overtime Pay Works and the 2026 Tax Deduction That Changes the Math

Last updated July 2, 2026

Overtime rules in the United States trace back to the Fair Labor Standards Act of 1938, and the core requirement has not changed: non-exempt employees who work more than 40 hours in a workweek must be paid at least 1.5 times their regular rate for every hour beyond that threshold. The workweek is defined as any fixed, recurring 168-hour period. At $20 an hour, an employee working 48 hours earns $800 in regular pay plus $240 in overtime, for a total of $1,040. California operates under a stricter framework, requiring time-and-a-half after 8 hours in a single day, and double time after 12 hours.

The One Big Beautiful Bill Act of 2025 created a new federal income tax deduction under IRC Section 225 for qualified overtime compensation. The deduction covers the premium portion of FLSA-required overtime for tax years 2025 through 2028, capped at $12,500 per year for single filers and $25,000 for married filing jointly, and phases out beginning at $150,000 MAGI. The deduction does not reduce FICA taxes, but at a 22 percent marginal rate, $6,000 in qualifying overtime premium saves approximately $1,320 in federal income tax.

Overtime is a legal requirement with precise math, and the new IRC Section 225 deduction makes the after-tax value meaningfully higher for eligible workers through 2028. Know your state's daily overtime rules, verify the current federal exemption threshold, and confirm your employer is applying the right rate to the right hours.