Methodology: No Tax on Overtime Calculator
What the calculator computes
Five inputs — filing status, hourly regular rate, FLSA overtime hours per week, weeks worked per year, and Modified Adjusted Gross Income (MAGI) — produce: the annual qualifying premium (the FLSA 0.5× portion), the cap (§ 225(b)) applied, the MAGI phase-out reduction applied, the resulting effective deduction, the approximate marginal federal rate, the estimated federal tax savings, and the W-2 Box 12 code TT amount the employer reports.
The formula
Given five inputs, the calculator computes twelve intermediate values. Each step maps to a specific provision of IRC § 225 or to a 2026 IRS publication.
1. premiumPerHour = hourlyRate × 0.5 // § 225(c)
2. annualQualifyingPremium = premiumPerHour × otHoursPerWeek × weeks
3. cap = joint ? $25,000 : $12,500 // § 225(b)(1)
4. cappedAt = min(annualQualifyingPremium, cap)
5. phaseOutThreshold = joint ? $300,000 : $150,000 // § 225(b)(2)
6. magiExcess = max(0, magi − phaseOutThreshold)
7. phaseOutReduction = min(cappedAt, magiExcess × 0.10)
8. effectiveDeduction = max(0, cappedAt − phaseOutReduction)
9. approxTaxableIncome = max(0, magi − standardDeduction[filing])
10. marginalRate = bracket(approxTaxableIncome, filing) // Rev. Proc. 2025-32
11. estimatedSavings = effectiveDeduction × marginalRate
12. boxTwelveAmount = annualQualifyingPremium (UNCAPPED) // IRC § 6051(a)(19)
Step 12 is intentionally the uncapped annual premium, not the deduction. The cap applies to the employee's 1040; the W-2 reports the full premium so the IRS can audit consistency across returns.
Worked examples
Six scenarios spanning the constraint space — full deduction, cap-binding, phase-out, fully-phased-out — verified against the formula above. Reproduce any of these by entering the inputs in the calculator.
| Filing | Rate | OT/wk | MAGI | Effective deduction | Bracket | Savings | Constraint |
|---|---|---|---|---|---|---|---|
| single | $25 | 5 | $65,000 | $3,250 | 22% | $715 | full deduction |
| single | $50 | 10 | $90,000 | $12,500 | 22% | $2,750 | cap binding |
| joint | $40 | 8 | $180,000 | $8,000 | 22% | $1,760 | full deduction |
| single | $25 | 5 | $170,000 | $1,250 | 24% | $300 | phase-out reducing |
| single | $25 | 5 | $200,000 | $0 | 32% | $0 | fully phased out |
| joint | $30 | 10 | $450,000 | $0 | 35% | $0 | fully phased out |
What the calculation assumes
- The employee is paid a flat hourly rate. Multi-rate workers (shift differentials, non-discretionary bonuses, piece-rate, commissions) have a different blended regular rate; the FLSA premium for those workers requires a weighted-average regular-rate calculation this calculator doesn't perform.
- The OT hours entered are FLSA-required (hours over 40 per workweek). State daily overtime, double-time, the 7th-day premium, CBA premiums, and exempt-employee policy "overtime" do not qualify under § 225(c) and should not be included in the input.
- The MAGI input approximates AGI for filers without significant above-the-line adjustments. Workers with student-loan interest deductions, traditional IRA deductions, or HSA contributions should subtract those before entering the figure.
- The marginal rate is approximated as the 2026 bracket at MAGI minus the standard deduction. Itemizers, QBI claimants, or filers with other above-the-line deductions may see a different actual marginal rate.
- Married filers must file jointly to claim § 225 at all — married-filing-separately is disqualified by statute. The calculator only offers single and joint options; MFS users would see $0 savings if the option existed.
What's modeled
IRC § 225 in full: the qualifying-premium definition from subsection (c), the $12,500 / $25,000 cap and MAGI phase-out from subsection (b), and the above-the-line treatment of the deduction. The 2026 federal tax brackets (Rev. Proc. 2025-32) and standard deductions ($16,000 single / $32,000 joint) drive the marginal-rate approximation. The W-2 Box 12 code TT amount is the uncapped annual qualifying premium, matching what employers report on the 2026 W-2 form finalized by the IRS on January 12, 2026.
What's not modeled (and why)
State income tax. State conformity varies widely (California and New York have decoupled; rolling-conformity states adopt automatically; static-conformity states need legislation; nine no-income-tax states are moot). Modeling each posture requires a state input and per-state guidance, much of which is still rolling out as of Q2 2026. The calculator surfaces federal-only savings with a clear disclaimer.
FICA (Social Security + Medicare). § 225 doesn't reduce FICA — Social Security and Medicare taxes are still owed on the full overtime check (the 1.0× straight time AND the 0.5× premium). The calculator's "savings" figure is federal income tax only.
Multi-rate / blended regular rate. Workers with shift differentials, non-discretionary bonuses, piece-rate pay, or commissions have a regular rate that varies week-to-week under FLSA regular-rate-of-pay rules (29 CFR 778.107–.122). The FLSA premium for those workers is the weighted-average regular rate × 0.5 × overtime hours, which this calculator doesn't compute. Average flat-hourly workers are within a few dollars; bonus-heavy workers can differ materially.
Retroactive pay timing. The IRS has not issued definitive guidance on retroactive overtime pay (e.g., a 2026 settlement for unpaid 2025 overtime). The calculator assumes pay in the year it relates to, following the conventional employer-side accrual; cash-basis individual taxpayers may need to attribute to the year received. Both treatments produce a valid estimator output; the IRS hasn't closed the timing question.
No Tax on Tips stacking. OBBB Section 70201 created a parallel deduction for tip income (IRC § 224) with the same MAGI phase-out. A tipped worker with both qualifying overtime and qualifying tips claims both deductions independently — this calculator only models § 225 (overtime). Tip income should be calculated separately.
When this gets re-reviewed
The calculator is reviewed against current law whenever any of these triggers fire, with the review date refreshed at the top of this page:
- Annual IRS bracket update — typically October each year for the following tax year (Rev. Proc. 2026-XX expected October 2026 for 2027 brackets). Updates
tax-brackets.tsand the worked-example numbers if marginal-rate boundaries shifted. - IRS guidance on open mechanical questions — retroactive pay timing, bonus recharacterization interactions with the regular rate, and weighted-average regular-rate calculations are open as of Q2 2026; definitive guidance triggers a re-review.
- Statute change — any Congressional amendment to IRC § 225 (extension past the December 31, 2028 sunset, cap or phase-out adjustments, qualifying-overtime-definition changes).
- State conformity changes — a new state decoupling or rolling-conformity-state legislative action would expand the scope of what the calculator could model (currently federal-only).
- Court ruling — a federal court interpretation of § 225(c)'s "required under section 7 of the FLSA" language that narrows or expands the qualifying-overtime universe.
Data sources
Statute: 26 U.S.C. § 225 (Cornell LII), added by Section 70202(a) of Public Law 119-21. 2026 tax brackets and standard deductions from IRS Rev. Proc. 2025-32 (PDF). 2025 transition relief and 2026 W-2 code TT mechanics from IRS Notice 2025-69 (PDF) and PayrollOrg's coverage of the January 12, 2026 W-2 finalization. Taxpayer Q&A from IRS Fact Sheet FS-2026-01.
Companion article: No Tax on Overtime: What the OBBB Deduction Actually Means for Employers.
How accurate is this?
Accurate enough for an orientation — typically within 10–15% of the actual savings from a fully-prepared 1040 for workers paid a flat hourly rate. Less accurate for bonus-heavy workers (blended regular-rate matters), filers with significant other above-the-line adjustments (changes effective bracket), or anyone near a bracket boundary (the calculator picks one rate; reality straddles two). For specific tax-planning decisions, run the calculation against a real prepared return or consult tax counsel.
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 above-the-line deductions, 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 bracket is wide ($48k–$103k for single 22%), so being off by a couple thousand dollars in taxable income usually doesn't change the bracket at all.
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 conformity varies widely: California and New York have decoupled (federal deduction added back on the state return), rolling-conformity states adopt automatically, static-conformity states require affirmative legislation, and 9 no-income-tax states are moot. Modeling each state's posture would require state-specific guidance (still rolling out as of Q2 2026) 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 above-the-line adjustments. 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 is online time clock software for small businesses — the simplest way to track employee time, with GPS location tracking, PTO accruals, job costing, and overtime calculation. Used in all 50 states since 2007.
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 tracks each pay code separately so payroll can pull the right number. See how Clockspot tracks overtime.