The IRS has released new guidance in the form of frequently asked questions (FAQs) to help eligible taxpayers claim the overtime compensation deduction.
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The IRS has released new guidance in the form of frequently asked questions (FAQs) to help eligible taxpayers claim the overtime compensation deduction. The guidance explains how the new reservation for special overtime pay works, who may be eligible and how it will be reported — at least for now.
(And remember: as with tips, this is a discount, not an exception. This is important for reference purposes.)
Here’s what you need to know.
What is special overtime pay?
The new discount only applies to special overtime compensation. According to the IRS, qualified overtime pay is the portion of overtime pay required under Section 7 of the Fair Labor Standards Act (FLSA) that exceeds an employee’s regular rate of pay.
In practical terms, if a taxpayer is paid “one and a half times” their regular rate for an hour of overtime work, the “half” portion of that payment—the amount above the regular rate—is treated as special overtime pay.
If you are paid overtime under state or local law or for another reason, but are not paid FLSA overtime, that pay does not qualify — regardless of the circumstances.
What do you mean by “Exceeds an employee’s normal rate of pay”?
You cannot deduct the entire overtime pay. The deductible is the portion that exceeds your regular statutory rate of pay—the “half” portion of time and a half compensation.
The IRS clarifies that while the additional half required by the FLSA may qualify, payments in excess of the premium required by the FLSA do not. This means that only half can be deducted, even if your overtime rate is two or three (or more) times your regular rate.
Who is Eligible?
Whether you are eligible to claim the deduction depends on whether you qualify for FLSA overtime. Eligibility is event and circumstance specific and depends on factors such as your occupation, job duties and earnings. The Department of Labor (DOL) has some resources explaining FLSA coverage and exclusions.
Most workers in the United States are covered by the FLSA, but not all are. You are usually covered if you work for a business engaged in interstate commerce, work for hospitals, schools, government agencies or large employers, or are an hourly or non-supervisory employee. Examples might include retail workers, warehouse workers, factory workers, construction workers, and most office and administrative staff. Many federal and state government employees are also covered.
Some employees are not covered by the FLSA, regardless of job duties. These may include independent contractors, some agricultural workers, some seasonal or recreational workers, some small farm employees, and some family businesses that employ immediate family members. If you’re not covered by the FLSA, you can’t get special overtime pay for purposes of the deduction — even if you’re overpaid for long hours.
To qualify under the rules, you must also be covered by the FLSA and not exempt from the overtime requirement.
Wait, how could someone be covered by the FLSA but exempt from overtime?
This is where things can get tricky. Many workers are covered by the FLSA, but are exempt from its overtime.
Common categories exempt from overtime—often referred to as “white-collar” exemptions—include executive employees (such as retail store managers), administrative employees (such as human resources managers or compliance officers), professional employees (such as, unfortunately, attorneys and CPAs), certain computer outside employees (such as software development employees) pharmaceutical sales representatives who work primarily off-site of an employer’s work).
If you fall into one of these exempt categories, you don’t get overtime required by the FLSA, even if you work more than 40 hours. This means that there is no specific overtime compensation for the discount.
If you’re not sure if you’re exempt, you can take a look on the DOL websiteor ask HR or Payroll to confirm your status.
What about federal employees?
For most federal employees, FLSA eligibility is documented on Standard Form 50, Notice of Personnel Action. Section 35 of the form lists the employee’s FLSA category with “N” indicating nonexpret, meaning the employee is eligible for overtime, and “E” indicating exemption.
The Office of Personnel Management administers the FLSA for most federal employees, although there are exceptions. DOL regulations apply to employees of the Library of Congress, the United States Postal Service, the Postal Regulatory Commission, and the Tennessee Valley Authority. Legislative branch employees are generally covered by rules issued by the Congressional Office of Workplace Rights.
Let’s assume it qualifies. How much is the discount?
The deduction for qualified overtime compensation is limited to $12,500 per return or $25,000 for married taxpayers filing jointly.
The discount is also subject to income limits. It begins to phase out when your modified adjusted gross income (MAGI) exceeds $150,000 for single filers or $300,000 for joint filers.
Are there any other special rules?
Yes. To claim the deduction, you must have a valid social security number for employment and include that number on your tax return. Married taxpayers must file a joint return to claim the deduction — the deduction is not available to those filing separately as married. If both you and your spouse received special overtime pay, you must both have valid social security numbers for employment, and you must include those numbers on your return.
Can I also remove my tips?
Only if it is specific advice and you meet the applicable requirements. But there is no double dip: special overtime compensation does not include special tips.
How will overtime be reported on my tax return in 2025?
The reservation for special overtime pay is calculated in a new Schedule 1-A in Part II. The actual amount of your deduction (after adjustments) appears on line 13 and is calculated along with deductions for tips, car interest, and the enhanced senior citizen deduction, resulting in the total on line 38. This total is then carried over to Form 1040, line 13b. Easy, right?
Remember, overtime pay is still reported as income (this is not an exception), but claimed as additional deduction. You don’t need to break down your bookings in detail to claim this (although you can).
How will overtime be reported by my employer in 2025?
For tax year 2025, employers and other payers are not required to report qualified overtime compensation separately on Forms W-2, 1099-NEC, or 1099-MISC. Some employers may choose to report the amount voluntarily—such as in Box 14 of Form W-2 or through an online portal—but many will not.
As a result, taxpayers should use reasonable methods, such as pay stubs and employer-provided documents, to determine the overtime portion. This might mean doing a little math.
(Guidance to help employers and other payers navigate the reporting requirements for special overtime compensation under the OBBBA can be found here.)
How will overtime be reported by my employer in 2026?
Beginning in tax year 2026, employers and other payers will have to report qualified overtime compensation separately. The IRS says Forms W-2, 1099-NEC and 1099-MISC will be updated to allow separate reporting.
How long will the discount be available?
The overtime deduction applies to tax years 2025 through 2028.
Where can I find guidance?
You can find Frequently Asked Questions about the discount for special overtime compensation at Fact Sheet 2026-01.
The Treasury Department and the IRS were also issued Notice 2025-62providing penalty relief to employers and other payers for tax year 2025 related to the new information reporting requirements, and Announcement 2025-69 for employees eligible to claim the deduction for tax year 2025.
Can I rely on this guidance?
Kind. Instructions found on the IRS website—including FAQs and newsletters—are not intended to be binding legal authority. Because this guidance is not published in the Internal Revenue Bulletin (IRB), it cannot be relied upon as precedent or used to support a legal argument in court. Only guidelines published in the IRB have privileged value.
That said, the IRS notes that taxpayers who reasonably and in good faith rely on these FAQs generally will not be subject to penalties that provide a reasonable standard of relief, including negligence or other accuracy-related penalties, to the extent the reliance results in an underpayment of tax.
What’s next for taxpayers?
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