New deduction for qualified overtime compensation

For tax years 2025 through 2028, individuals who receive qualified overtime compensation may deduct the amount that exceeds their regular rate of pay (generally, the “half” portion of “time-and-a-half” compensation). Beginning in 2026, this portion of pay will be reported on Form W-2 or Form 1099.

Qualified overtime – qualified overtime compensation is overtime compensation paid to an individual under section 7 of the Fair Labor Standards Act (FLSA) that exceeds the regular rate at which the individual is employed. For overtime to be required under the FLSA, it must be paid to an individual who is both covered by the FLSA and not exempt from the FLSA’s overtime requirement. Please check with your employer if you are uncertain if you are eligible for overtime compensation.

Individuals eligible for overtime under FLSA generally must receive overtime pay for hours worked more than 40 hours in a workweek at a rate of not less than one-half times their regular pay. NOTE – if an employer pays double the individuals’ regular rate for hours worked over 40 in a workweek, only the one-half portion is eligible for the deduction. Premium or pay differential compensation amounts are not eligible for this deduction.

How much may I deduct? The deduction is up to $12,500 of qualified overtime compensation earned for the year per return ($25,000 in the case of a joint return). The deduction is reduced if a taxpayer’s modified adjusted gross income (MAGI) exceeds $150,000 ($300,000 for joint filers).

Additional rules to claim the deduction include:

• The taxpayer receiving overtime compensation must have a social security number valid for employment and include the social security number on the tax return claiming the deduction.
• If the taxpayer is married, they must file a joint return to claim the deduction. If both spouses receive qualified overtime compensation, both spouses must have a valid social security number valid for employment and must include both social security numbers on the tax return claiming the deduction.

What to do if your employer did not include your qualified overtime compensation on your Form W-2

• Please include your last pay stub of the year that shows your year-to-date overtime compensation so we may assist you in calculating the amount of overtime compensation that may be claimed as a deduction.