The IRS has issued detailed guidance on a new federal income tax deduction for qualified overtime compensation — and if you or your employees earn overtime pay, this is a planning opportunity worth understanding now. At RMG, staying ahead of tax law changes so you can make the most of them is exactly the kind of proactive advisory work we bring to every client relationship. Here is what you need to know.
What Is Qualified Overtime Compensation?
Under the new rules, qualified overtime compensation is defined as the portion of overtime pay that exceeds an employee’s regular rate of pay and is required under the Fair Labor Standards Act (FLSA). Essentially, this is the extra half-time in a time-and-a-half overtime wage — not the entire overtime payment, just the premium portion above the regular rate.
For example, if an employee’s regular rate of pay is $20 per hour and they receive $30 per hour for overtime hours worked, the $10 premium above the regular rate constitutes qualified overtime compensation eligible for the deduction.
Notably, only FLSA-required overtime qualifies. Amounts paid as overtime for other reasons — such as solely under state law or employer policy — may not qualify unless they are also FLSA-required overtime premiums.
Who Is Eligible?
Eligibility for this deduction hinges on several key factors:
- FLSA overtime eligibility: The taxpayer must be covered by and not exempt from the FLSA’s overtime rules (29 USC 207). Coverage depends on job duties, earnings level, and employer size.
- Valid Social Security number: The employee must have a Social Security number that is valid for employment.
- Filing status: Married taxpayers must file a joint return to claim the deduction. Both spouses, if they received qualified overtime compensation, must include valid SSNs on the return.
How Much Can You Deduct?
For tax years 2025 through 2028, the deduction limits are:
- Up to $12,500 of qualified overtime compensation per individual tax return, and
- Up to $25,000 on a joint return.
The deduction is claimed on the individual income tax return in computing taxable income — not as an adjustment to gross income — meaning it does not reduce adjusted gross income (AGI).
Importantly, taxpayers do not need to itemize deductions to claim this benefit. The qualified overtime compensation deduction may be claimed in addition to the standard deduction, subject to the applicable dollar limits and income phase-outs described below.
Income Phase-Out Rules
The deduction begins to phase out at the following modified adjusted gross income (MAGI) thresholds:
- $150,000 MAGI for single filers
- $300,000 MAGI for joint filers
Detailed phase-out computations and definitions of MAGI are provided in IRS Notice 2025-69, which should be consulted for precise planning and compliance.
Reporting and Compliance
For the 2025 tax year, employers are not required to separately report qualified overtime compensation on Forms W-2, 1099-NEC, or 1099-MISC. Taxpayers should therefore use their payroll records and the guidance in IRS Notice 2025-69 to calculate the deduction accurately.
Beginning with tax year 2026, employers will be required to separately report qualified overtime compensation on updated tax forms, which will simplify compliance going forward.
Looking Ahead
The IRS’s qualified overtime compensation deduction represents a meaningful tax opportunity for workers who earn overtime pay and meet specific eligibility requirements. But like most tax provisions, the details matter — and getting them right requires thoughtful planning.
At RMG, our team monitors developments like this one closely so we can help you incorporate new opportunities into your broader tax strategy before deadlines approach. Whether you are an individual earner, a business owner looking out for your workforce, or both, we are here to help you navigate these rules with confidence.
To discuss how this deduction may apply to your situation, contact the RMG team at rmgcpallc.com or reach out to your RMG engagement professional directly. We are ready to help.
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*The materials provided in the Insights section are for general informational purposes only and may not reflect the most current legal, tax, or financial developments. While we strive to ensure accuracy at the time of publication, RMG CPA LLC does not guarantee that the information remains up-to-date or free from error. We recommend consulting directly with a RMG CPA LLC team member to confirm the applicability and relevance of any information to your specific situation.