No Tax on Overtime in Virginia: Premium Half and the $12,500 Cap

For Virginia workers, “no tax on overtime” is a federal deduction that also lowers your Virginia income tax automatically. The One Big Beautiful Bill Act, signed July 4, 2025, lets qualifying non-exempt employees deduct up to $12,500 of overtime premium pay from federal adjusted gross income for tax years 2025 through 2028. Because Virginia starts its tax calculation from your federal AGI, that reduction carries straight onto your state return without any extra form or subtraction code.¹

What a Virginia Filer Actually Saves

Virginia’s top marginal rate is 5.75% on taxable income above $17,000. Every $1,000 the federal deduction shaves off your AGI saves about $57.50 in Virginia tax. A worker who claims the full $12,500 federal deduction reduces Virginia tax by roughly $719, on top of the federal savings.

Virginia conformed to the federal law during its 2026 session, when the General Assembly replaced rolling conformity with a fixed conformity date of December 31, 2025.² The result is that the lower federal AGI carries to Line 1 of Virginia Form 760 with nothing added to Schedule ADJ.³

Who Qualifies

The deduction is limited to workers covered by the Fair Labor Standards Act and not exempt from its overtime rules. If your right to overtime comes from Virginia law, a union contract, or an employer policy rather than the FLSA itself, that pay does not qualify.⁴

Salaried employees in executive, administrative, or professional roles earning at least $684 per week are generally exempt under the FLSA and cannot claim the deduction, even if their employer pays extra for long hours. Manual laborers, production workers, mechanics, construction workers, first responders, and similar non-exempt employees remain covered.⁵

Two filing rules also apply. Your return needs a valid Social Security number, and married taxpayers must file jointly to claim the deduction.⁶

Only the Premium Half Counts

The deduction covers the premium portion of overtime pay, not the whole overtime hour. When your employer pays time-and-a-half as the FLSA requires, the deductible amount is the extra half.⁴

Say you earn $20 per hour and work 10 overtime hours at $30 per hour. The qualified overtime compensation is the $10 premium multiplied by 10 hours, or $100. The base $20 you earned during those overtime hours stays fully taxable. If your employer pays double-time for holidays, only the half-time portion required by the FLSA counts; the rest does not qualify.

The $12,500 Cap and the Phase-Out

The maximum deduction is $12,500 per return, or $25,000 for joint filers. You deduct whichever is lower: your actual qualified overtime pay or the cap.⁴

The cap starts shrinking once modified adjusted gross income exceeds $150,000 for single filers or $300,000 for joint filers. For every $1,000 above the threshold, the maximum drops by $100. A single filer earning $200,000 is $50,000 over, so the cap falls by $5,000, leaving $7,500 available. The deduction phases out completely at $275,000 single or $550,000 joint.⁶

What the Deduction Does Not Cover

The benefit applies only to federal income tax (and, through the AGI link, Virginia income tax). Social Security tax at 6.2%, Medicare tax at 1.45%, and any Additional Medicare Tax still apply to every dollar of overtime. Paycheck withholdings for payroll taxes do not change; you see the benefit when you file.

Overtime required only by state law or a union contract, not the FLSA, does not qualify.
Salaried FLSA-exempt employees cannot claim it, even if paid extra for long hours.
Bonuses and commissions that are not tied to hours over 40 in a workweek do not count, regardless of pay-stub labeling.
The regular-rate portion of overtime hours is still fully taxable; only the premium half qualifies.

How to Claim It on Your Return

Beginning with the 2026 tax year, employers must report qualified overtime compensation in a designated W-2 box. For 2025 returns, many workers had to calculate the figure themselves from pay stubs.⁴

You claim the deduction on Part III of Schedule 1-A (Form 1040), labeled “No Tax on Overtime.” The form walks through entering your qualified overtime pay, applying the cap, and calculating any phase-out. The amount then transfers to Schedule 1 and reduces your AGI.⁶ On Virginia Form 760, the lower AGI flows to Line 1 automatically, and no separate Virginia entry is needed.³

Is There a Separate Virginia Overtime Subtraction

Not right now. SB143, introduced in the 2026 legislative session, would have created a Virginia-specific subtraction stacked on top of the federal flow-through: 25% of the federal overtime deduction for 2026 and 50% for 2027 and later years.⁷ The Senate Finance and Appropriations committee continued the bill to the 2027 session in January 2026, so it did not advance. The only Virginia overtime tax benefit available today is the automatic reduction from the federal deduction.

1
Virginia Tax. Subtractions
2
Virginia Tax. Virginia’s Rolling Conformity to the Internal Revenue Code Replaced With Fixed Date of December 31, 2025
3
Virginia Department of Taxation. Virginia Form 760 – Resident Income Tax Return
4
IRS. Questions and Answers About the New Deduction for Qualified Overtime Compensation
5
U.S. Department of Labor. Fact Sheet 17A – Exemption for Executive, Administrative, Professional, Computer and Outside Sales Employees Under the Fair Labor Standards Act
6
IRS. 2025 Schedule 1-A (Form 1040)
7
Virginia State Legislative Information System. SB143 – 2026 Regular Session