⏱️ Overtime Deduction Update · 2025–2028

“No Tax on Overtime” – New 2025 Rules for Extra Hours

IRS guidance on deducting the overtime “premium” portion of your pay when you work more than 40 hours.

📌 How the Overtime Deduction Works

• Applies to tax years 2025 through 2028.

• You may deduct the overtime premium (generally the “half” part of “time-and-a-half”) required by the Fair Labor Standards Act (FLSA).

• Overtime must be reported on a Form W-2, Form 1099, or other specified statement furnished to you.

• Maximum annual deduction: $12,500 ($25,000 for joint filers).

• Deduction phases out when modified AGI is over $150,000 (single, HOH, etc.) or $300,000 (married filing jointly).

• Available whether you itemize deductions or take the standard deduction.

Important: This deduction does not change your rights to overtime under the FLSA or state law. It only affects how your overtime is treated on your federal income tax return.

💡 Overtime Deduction Scenarios

Here are numbered examples from the IRS guidance. Each one shows how to find the portion of your overtime pay that may qualify for the deduction.

1

🧾 Scenario 1 – Overtime Premium Shown Separately

Andrew works overtime in 2025. His payroll statement shows:

• “Overtime premium” of $5,000 for the year.

Andrew may include the $5,000 overtime premium as his qualified overtime compensation for the 2025 deduction (subject to the annual and income limits).

2

📊 Scenario 2 – Only Total Overtime Shown on Pay Stub

Using the same facts as Scenario 1, except Andrew’s payroll statement shows:

• Total “overtime” pay of $15,000 (regular pay for overtime hours + overtime premium combined).

To find the FLSA overtime premium portion, Andrew divides the total overtime by 3:
$15,000 ÷ 3 = $5,000.
He may include $5,000 as his qualified overtime compensation for 2025.

3

💼 Scenario 3 – Employer Pays Double-Time for Overtime

Brad works overtime in 2025. His employer pays overtime at 2× his regular rate, and his last pay stub for 2025 shows:

• Total “overtime” pay of $20,000.

To isolate the FLSA overtime premium portion when overtime is paid at double-time, Brad divides the total overtime by 4:
$20,000 ÷ 4 = $5,000.
Brad may include $5,000 as his qualified overtime compensation for the deduction.

4

🚓 Scenario 4 – Law Enforcement Paid on a 14-Day Work Period

Carol is a covered, nonexempt law enforcement employee under the FLSA. She is paid overtime on a 14-day “work period” basis that complies with FLSA rules.

• In 2025, she receives $15,000 in overtime pay under this work-period schedule.

To determine her qualified overtime compensation, Carol divides her total overtime by 3:
$15,000 ÷ 3 = $5,000.
Carol may include $5,000 as her qualifying overtime premium amount for 2025.

5

🏛️ Scenario 5 – Government Employee Paid Comp Time

Diane works for a state or local government agency that provides compensatory time off at a rate of 1.5 hours for each overtime hour worked.

• In 2025, she receives $4,500 in wages for using her comp time.

To determine the portion that counts as qualified overtime compensation, Diane takes one-third of the comp-time wages:
$4,500 ÷ 3 = $1,500.
Diane may include $1,500 as her qualifying overtime premium amount for 2025.

This summary is for general educational purposes only and is based on current IRS guidance. It does not change your rights under the Fair Labor Standards Act (FLSA). Always review official IRS instructions or speak with YOUR qualified PAYROLL professional about your specific situation.