The OB3 qualified overtime deduction (sometimes called “no tax on overtime”) does not make overtime pay tax-free on your paycheck. Instead, it creates a new federal income tax deduction you can claim on your tax return for qualified overtime premium pay earned in tax years 2025–2028. Employers still withhold taxes as usual, and Social Security, Medicare, and most state taxes still apply.
Only the overtime premium portion qualifies meaning, generally, the “extra half” in time-and-a-half pay. For example, if your regular rate is $20/hour and your overtime rate is $30/hour, only the $10/hour premium is potentially deductible. Your regular wages, even when earned during overtime hours, are not deductible under the new OB3 law.
To qualify, the overtime must be required under the federal Fair Labor Standards Act (FLSA). That typically means you are non-exempt (overtime-eligible) and worked more than 40 hours in a workweek. Overtime paid solely because of state law (like in California), a union contract, or employer policy, and when FLSA does not require it, does not qualify for the deduction.
For example, if you work 9 hours per day in California, but only 3 days that week for 27 hours, you’d get 3 hours of overtime due to state law, but since it’s under 40 for the week, the deduction wouldn’t apply.
The deduction is also capped at $12,500 per year (or $25,000 if married filing jointly) and begins to phase out at $150,000 of modified AGI ($300,000 for joint filers). You can claim it whether or not you itemize, but you must include a valid Social Security number, and married taxpayers must file jointly to receive it.
What about Overtime From Local Laws?
California has daily overtime rules. Typically, employees are entitled to overtime anytime they work more than 8 hours in a day, but that overtime isn’t required under FLSA overtime rules. FLSA rules say overtime is ordinarily accumulated only at 40 hours in a work week. This is likely to create headaches for employers as they try to parse their overtime data for the new law. Many employees will have to estimate their FLSA qualified overtime in 2025 because it might be difficult to go back and recalculate exactly what applies and what does not.
Another common question is whether double time qualifies. The answer: only the portion that equals the FLSA-required premium. If overtime (and then double time) is worked on a Monday but the week’s total hours is less than 40, none of that premium time is qualified for the write off because FSLA doesn’t require it.
Similarly, when an employee is paid a double time rate, FLSA still only requires time and half pay, so employees cannot deduct the entire double time premium portion. When paystubs show a separate premium for double time, only half of that premium qualifies for the deduction. When overtime is shown as one combined amount, the qualified portion is typically one-fourth of the total double-time pay. Daily double time that does not involve exceeding 40 hours in a week usually does not qualify at all.
There are also special FLSA outliers, including public safety employees using work periods, public-sector comp time, and hospital or residential care with 8/80 schedules. In all cases, the deductible amount is limited to the premium required by the applicable FLSA subsection, and the deduction generally applies only when overtime is actually paid.
No Tax On Overtime Reporting for Next Year
Going forward, we suggest you sign up for a service like Timesheets.com. We have modified our reporting for this new law to keep track of overtime, both in California and elsewhere. You can expect next year’s calculations to be easy and fast.
No Tax on Overtime Calculator
To estimate your qualified overtime deduction and potential tax impact, use the No Tax on Overtime Calculator from Timesheets.com:
https://www.timesheets.com/business-math-calculators/no-tax-on-overtime-calculator/
