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IRS FAQs Provide Guidance On Deduction for Qualified Overtime Compensation
(Parker Tax Publishing January 2026)
The IRS provided answers to frequently asked questions (FAQs) about the new deduction for qualified overtime compensation under Code Sec. 225, which was enacted by the One Big Beautiful Bill Act (Pub. L. 119-21). The FAQs contain additional information about the deduction, provide resources for employees (including federal employees) to assist them in determining whether they received qualified overtime compensation under the Fair Labor Standards Act, and contain information regarding the differences in reporting requirements for tax year 2025 and 2026-2028. FS-2026-01.
Background
The One, Big, Beautiful Bill Act (OBBBA) (Pub. L. 119-21), added a new deduction for qualified overtime compensation under Code Sec. 225. In Notice 2025-69, the IRS clarified for individuals how to determine the amount of their deduction for qualified overtime compensation for the 2025 tax year.
On January 23, the IRS provided answers to frequently asked questions (FAQs) regarding the deduction for qualified overtime compensation. The following is a summary of the guidance contained in the FAQs.
Definition of Qualified Overtime Compensation
Qualified overtime compensation is overtime compensation paid to an individual required under section 7 of the Fair Labor Standards Act (FLSA) that exceeds the regular rate at which the individual is employed. For example, if an individual is paid one and one-half times their regular rate for an hour of overtime work as required by the FLSA, the "half" portion is qualified overtime compensation.
In addition, the FAQs provide the following guidance:
For overtime to be required under the FLSA, it must, among other requirements, be paid to an individual who is both covered by the FLSA and not exempt from the FLSA's overtime requirement (an FLSA overtime-eligible employee).
An individual who is ineligible for overtime under the FLSA does not receive qualified overtime compensation regardless of other laws or circumstances (such as a collective bargaining agreement) providing for overtime pay.
Individuals eligible for overtime under the FLSA generally must receive overtime pay for hours worked in excess of 40 in a workweek at a rate not less than one and one-half times their regular rate of pay. If an individual is eligible for overtime under the FLSA, but the individual's employer pays more than is required under the FLSA, the qualified overtime compensation is limited to the portion of the overtime that is required by the FLSA that is in excess of the regular rate. For example, if an employer pays double the individual's regular rate for hours worked over 40 in a workweek, only the one-half portion that is relied upon to comply with the FLSA requirement is qualified overtime compensation.
FLSA Exemptions
Though it is common for employees working in the United States to be covered by the FLSA, there are many exemptions from its overtime premium requirement. Whether an individual is covered by and not exempt under the FLSA is a fact-specific determination that depends on the individual's occupation, work activities, and/or earnings. The IRS advises that more information on coverage and exemption under the FLSA can be found on the Department of Labor's (DOL's) website.
For federal employees, FLSA eligibility is typically documented on the employee's Standard Form 50, Notification of Personnel Action. The Office of Personnel Management (OPM) administers the FLSA for most federal employees.
Deduction Amount and Limits
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) for the tax year exceeds $150,000 ($300,000 for joint filers). More information on how to calculate MAGI for this purpose is provided in Notice 2025-69.
Other Applicable Rules
The taxpayer who received the qualified overtime compensation must have a social security number valid for employment and must include the social security number on the tax return claiming the deduction.
If the taxpayer is married (within the meaning of Code Sec. 7703), the taxpayer and the taxpayer's spouse must file a joint return to claim the deduction. If both spouses received qualified overtime compensation, both spouses must have a social security number valid for employment and must include both social security numbers on the tax return claiming the deduction.
Separate Reporting of Qualified Overtime Compensation
For tax year 2025, Notice 2025-62 provides that employers and other payers are not required to report qualified overtime compensation separately on Form W-2, Wage and Tax Statement, Form 1099-NEC, Nonemployee Compensation, and Form 1099-MISC, Miscellaneous Information. For 2025, some employers and other payers may choose to separately report the amount of qualified overtime compensation to employees using box 14 of Form W-2 or to employees or payees through an online portal or on a separate statement. If individuals do not receive a Form W-2 or other statement from their employer or other payer for tax year 2025 that separately reports the amount of qualified overtime compensation, they may use any of the methods described in Notice 2025-69 and the Instructions to Schedule 1-A (included in the Instructions for Form 1040) to calculate the amount of qualified overtime compensation.
For tax years 2026 and later years, employers and other payers are required to separately report qualified overtime compensation. The IRS states that Forms W-2, 1099-NEC, and 1099-MISC will be updated to allow employers and other payers to provide separate reporting of an individual's qualified overtime compensation.
If an FLSA overtime-eligible employee does not receive information from his or her employer on how much qualified overtime compensation he or she received during tax year 2025, the IRS advises that more information to help determine the taxpayer's deduction for qualified overtime compensation can be found in the following:
Notice 2025-69;
The IRS web page "Treasury, IRS provide guidance for individuals who received tips or overtime during tax year 2025" (IR-2025-114); and
The Instructions for Schedule 1-A included in the Instructions for Form 1040.
If the taxpayer is an FLSA overtime-eligible federal employee, special rules may apply with respect to calculating his or her qualified overtime compensation. The IRS advises taxpayers to visit the OPM web page "How to Compute FLSA Overtime Pay" for a fact sheet applicable to most federal employees.
For a discussion of the deduction for qualified overtime compensation, see Parker Tax ¶81,800.
Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.
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