No Tax on Overtime for Trade Techs (2026): How It Really Works

If your techs worked a heat wave, a freeze, or a busy storm season, they’re going to ask you about “no tax on overtime” when W-2s come out. Some of them think their overtime is now tax-free. It isn’t, and the difference matters for what you put on their W-2.

Here’s how the deduction works for trade shops: hourly techs, flat-rate techs, commission techs, and the 1099 subs who don’t qualify at all.

What the deduction actually is

The 2025 tax law (often called the One Big Beautiful Bill Act) created a federal deduction for qualified overtime compensation. Per the IRS:

• It covers the pay above the regular rate for overtime required by the FLSA — for example, the half-time premium in time-and-a-half.
• It’s effective for 2025 through 2028.
• It’s capped at $12,500 ($25,000 for joint filers) and phases out above $150,000 of modified AGI ($300,000 joint).
• You can claim it whether or not you itemize.
• You must include a Social Security number on the return, and married couples must file jointly.

It’s a deduction, not an exemption. It lowers taxable income on the employee’s federal return. It doesn’t change what you withhold or what you pay in payroll taxes.

What counts as qualified overtime

Two tests both have to be true:

1. The FLSA requires the overtime. Under federal law, that generally means hours over 40 in a workweek for a non-exempt employee.
2. Only the premium counts. The straight-time part of overtime pay is regular wages. Only the extra half qualifies.

The IRS FAQ example: a worker with a $20 regular rate works 10 overtime hours at $30. They earn $300 for those hours, but only $100 (10 × $10 premium) is qualified overtime. The other $200 is regular pay.

Double time works the same way: only the part needed to reach time-and-a-half counts. Anything above that doesn’t.

Examples: hourly, flat-rate, and commission techs

Trade shops pay techs in different ways, and the FLSA “regular rate” changes with each one. These are simplified examples for a single 50-hour week (10 overtime hours).

*Commissions and non-discretionary bonuses generally go into the FLSA regular rate, so the premium is figured on $30, not $25. Some commission-paid employees at certain service businesses can be exempt from overtime under FLSA section 7(i); if a tech is exempt, nothing qualifies. Confirm classification with your payroll provider.

The takeaway for owners: if you pay flat-rate or commission, your payroll needs real hours worked and a correct regular-rate calculation. A tech can’t claim what your payroll never calculated.

What doesn’t count

• State-only overtime. If your state requires daily overtime (for example, over 8 hours in a day) but the employee didn’t go over 40 for the week, the FLSA didn’t require it. Per the IRS FAQs, overtime required only by state law, company policy, or a union contract doesn’t qualify.
• Extra premiums above FLSA. Double time, holiday premiums, or contract rates above time-and-a-half only count up to the time-and-a-half level.
• Exempt employees. If the employee isn’t FLSA-eligible for overtime, nothing qualifies, no matter what the paycheck calls it.
• 1099 subcontractors. Independent contractors aren’t owed FLSA overtime, so there’s nothing to deduct. More: 1099 contractors tax guide for trades.
• Owners. Sole proprietors and partners aren’t employees. S-corp owner-employees are usually salaried and exempt.
• The straight-time part of any overtime hour.

Limits and phase-out

The deduction is capped at $12,500 per person ($25,000 joint). Most techs won’t hit the cap: at a $15 premium, a tech would need more than 830 overtime hours in a year to reach $12,500.

It phases out above $150,000 of modified AGI ($300,000 joint). Most commonly cited guidance describes the reduction as $100 for every $1,000 over the threshold. Example: a single filer with $170,000 of modified AGI is $20,000 over, so the maximum drops by $2,000, to $10,500. High-earning lead techs and dual-income households should check this with their tax preparer.

Social Security, Medicare, and state taxes

• FICA still applies. The deduction is on the federal income tax return. You still withhold Social Security and Medicare on all overtime pay, and you still pay the employer share.
• Federal withholding doesn’t change automatically. Techs who want smaller withholding during the year can update their W-4.
• State income tax depends on your state. Some states follow federal deductions and some don’t. In states with no income tax, like Texas, this part doesn’t apply. See best states with no income tax for service businesses.

2025 vs 2026 reporting: box 12, code TT

Tax year 2025 was a transition year. Employers weren’t required to separately report qualified overtime on 2025 W-2s, so many employees and preparers had to work it out from pay stubs and payroll records.

Tax year 2026 is different. The final 2026 Form W-2 adds box 12, code TT for qualified overtime compensation — the FLSA-required “and-a-half” portion. Those W-2s go out in early 2027. If your payroll reports the full overtime pay instead of just the premium, or reports state-only overtime, your techs’ numbers will be wrong.

What shop owners need to do now

Your field software can help with the inputs. Vortech tracks jobs, commission splits, and weekly earnings, and exports them to CSV for your payroll provider. It isn’t a payroll system or a time clock, so hours worked and overtime math still belong in payroll.

W-2 vs 1099 techs: the hiring angle

Through 2028, a W-2, non-exempt tech who works overtime gets a federal deduction a 1099 sub can’t. In a tight labor market, that’s a real recruiting point for shops that run techs as employees: “your overtime premium is deductible here.”

It also cuts the other way. Calling employees “1099” to avoid overtime was already risky. Now it also costs your techs a deduction, which gives them one more reason to question the classification. If you’re unsure, read our 1099 guide and talk to an employment attorney. Injuries are another reason classification matters: what happens if a tech gets hurt on the job.

Common mistakes

• Reporting all overtime pay as qualified. Only the premium counts.
• Counting state daily overtime when the tech didn’t go over 40 hours for the week.
• Leaving commissions out of the regular rate, which understates the premium.
• No hours for flat-rate techs. Without hours, you can’t calculate overtime at all.
• Telling techs overtime is tax-free. Social Security, Medicare, and possibly state tax still apply.
• Assuming it’s permanent. As written, it ends after 2028.

FAQ

Sources: IRS, “One Big Beautiful Bill Act: Tax deductions for working Americans and seniors” (FS-2025-03) and IRS FAQs on qualified overtime compensation; final 2026 Form W-2 box 12 codes as reported by HRMorning; NATP summary of IRS overtime FAQs. Checked November 2026.