Workers may deduct only the premium half of overtime wages, not the full pay, cutting expected tax savings by roughly two-thirds.
The IRS overtime tax deduction applies solely to the extra half of time-and-a-half pay, not the entire overtime wage. This means only about one-third of overtime earnings qualify for the break, contrary to common assumptions.
Federal labor law mandates overtime pay at 1.5 times the regular rate, but the deduction targets only the 0.5x premium. The remaining 1x regular rate remains fully taxable, subject to FICA payroll taxes of 7.65% and income tax until filing.
The deduction phases out at higher incomes, and payments like shift differentials or voluntary holiday pay typically do not qualify under IRS guidance.