A new deduction is allowed for tax years 2025 through 2028 of up to $12,500 ($25,000 for married filing jointly) for qualified overtime compensation. This additional deduction is allowed for both taxpayers who itemize deductions or who take the standard deduction. For married taxpayers, the $25,000 limit can be allocated between spouses in any way.
“Qualified overtime compensation” is overtime compensation paid to an individual required under Section 7 of the Fair Labor Standards Act of 1938 (FLSA) that is in excess of the regular rate at which such individual is employed. For example, if an employee is paid at a standard rate of $12 per hour and an overtime rate of $18 per hour, the deduction is based on the $6 per hour excess paid for overtime. Overtime amounts paid in excess of one and one-half times the regular rate are not deductible.
The overtime premium in FLSA is one and one-half times the standard compensation rate. According to the IRS Notice 2025-69, compensation in excess of the FLSA required rate is not eligible for the deduction.
For example, an employer may choose to pay a higher overtime amount than the one and one-half times an individual’s regular rate of pay that is generally required by the FLSA (e.g., the employer may choose to pay double time for hours worked over 40 in a workweek) or they may choose to pay employees an extra amount to work on weekends or holidays. In such cases, while the additional one-half times portion required by the FLSA may be qualified overtime, payments in excess of the FLSA-required premium are not.
Examples of the calculations and limitations are provided in IRS Notice 2025-69.
show less
To qualify, overtime pay must be reported on Form W-2 or Form 1099 to workers. There was insufficient time to adopt new procedures for Form W-2 reporting for 2025. Under a transition rule, payors (generally, employers) can report an approximate amount of overtime pay on these forms or in a supplementary statement for the 2025 tax year.
Because employers and other payors will not be required to separately account for qualified overtime compensation (due to a transitional rule for 2025), a separate accounting of qualified overtime compensation will not appear on written statements furnished to individuals for tax year 2025 absent an entry in box 14 of Form W-2 or a separate statement containing that information. Consequently, individuals who are not furnished a separate accounting of qualified overtime compensation in box 14 of Form W-2 (or on a separate statement) must make a reasonable effort to determine whether they are considered FLSA-eligible employees, which may include asking their employers or other service recipients about their status under the FLSA.
For tax year 2025, a separate accounting of qualified overtime compensation may not appear on the written statement furnished to the individual. Some employers may choose to report the amount of qualified overtime compensation to employees using box 14 of Form W-2 or on a separate statement, in which case employees may treat the separate accounting requirement as satisfied for purposes of their eligibility for the deduction and use this amount for purposes of determining the deduction under section 225. If the amount of qualified overtime compensation is not provided by the employer in box 14 of the Form W-2 or on a separate statement, the Treasury Department and the IRS have determined that, for tax year 2025, an FLSA-eligible employee may (1) treat the separate accounting requirement as satisfied if the qualified overtime compensation is properly reported on the individual’s Form W-2, Form 1099-NEC, or From 1099-MISC, without regard to the requirements of section 6051(a)(19) (to separately account for the amount of qualified overtime compensation), copies of which are furnished to the individual, and (2) base the determination of the amount of qualified overtime compensation (subject to the other limitations and requirements for qualified overtime compensation in section 225 of the Code) on other documentation such as earnings or pay statements, invoices, or similar statements that support the determination, using a reasonable method described below to determine the amount of the qualified overtime compensation. Individuals who had multiple employers during 2025 may use different methods for each employer.
See additional information and examples in IRS Notice 2025-69.
show less
- The deduction is limited to $12,500 ($25,000 for married filing jointly)
- The $25,000 limit for married taxpayers filing a joint return applies to the couple overall.
- Married taxpayers must file jointly
- The deduction begins to phase out at AGI over $150,000 ($300,000 MFJ)
- The deduction is for income tax calculations. The entire amount of overtime is still subject to employee withholding taxes for Social Security and Medicare, and for self-employment taxes
- To qualify, workers must:
- Be classified as non-exempt employees under the Fair Labor Standards Act (FLSA)
- Work more than 40 hours per week at a rate not less than time an one-half their regular rate of pay
- Salaried employees may qualify, but there are additional limitations
- Most salaried employees are exempt from FLSA requirements and don’t qualify
- Must make less than $150,000 per year
- Must maintain proper documentation of hours worked and overtime earned
Section 225(c) of the Code limits qualified overtime compensation to overtime compensation in excess of the individual’s regular rate that is required and paid under 29 USC § 207. In order for overtime to be required under 29 USC § 207, it must, among other requirements, be paid to an individual who is both covered by and not exempt from the FLSA (an FLSA-eligible employee). Thus, an individual who is ineligible for Federal overtime (an FLSA-ineligible employee) will generally not be paid overtime.
However, some FLSA-ineligible employees are eligible for overtime under State law or are paid premium rates for certain work for other reasons. Overtime compensation paid to FLSA-ineligible employees is not qualified overtime compensation within the meaning of section 225(c) with respect to such employment, regardless of applicable State law provisions or other circumstances causing these amounts to be paid.
show less
This is a “below the line deduction” meaning the deduction affects calculation of tax after limitations affected by AGI. It won’t help a taxpayer qualify for and/or increase the amount of other tax breaks with AGI-based eligibility requirements or phaseouts. This deduction, along with the new deductions for tax on tips, the additional senior deduction, and new car loan interest will be calculated on the new Schedule 1-A.
Like this:
Like Loading...
