Reporting Qualified Overtime for 2025

The One Big Beautiful Bill Act (OBBBA) passed in July creates a new federal income tax deduction for “qualified overtime” pay for eligible taxpayers. Employers are responsible to provide the amount of qualified overtime that is eligible to be excluded to their employees. The IRS has issued guidance on the reporting of Qualified Overtime Compensation for the 2025 reporting year and has designated 2025 as a transition year and therefore will not penalize employers for failing to separately report qualified overtime or report it on the employee’s W-2 or 1099.

The IRS recognizes employers may not have the required information or procedures in place to be able to correctly file the additional information and provide it to employees. Despite this, the IRS encourages employers to provide employees with the necessary overtime amounts by either reporting the information in Box 14 of the W-2, via an online portal or providing the information to the employee on a separate statement. Because the standard W-2 form for 2025 will not have a dedicated box for qualified overtime, employees will need to rely on the information provided by their employer to claim the deduction on their personal Form 1040.

What qualifies for the overtime deduction

Only the premium portion of the overtime pay, not the entire amount, qualifies for the deduction, up to an annual limit. The qualified overtime deduction is only for the “half” portion of the “time-and-a-half” overtime rate required by the FLSA. It does not include the straight-time portion.

Calculation

If an employee’s regular rate is $20 per hour, and their overtime rate is $30, the extra $10 per hour is the deductible premium portion.

Example for an hourly employee

An employee works 50 hours at a $20 regular rate. Their overtime pay is 10 hours at a premium of $10 per hour, for a total of $100 in qualified overtime.

Apply the maximum deduction and phase-outs

The maximum deduction for qualified overtime is $12,500 for single filers and $25,000 for married couples filing jointly. The deduction begins to phase out for taxpayers with a modified adjusted gross income over $150,000 (or $300,000 for joint filers).

Federal versus state overtime

Only overtime required by federal FLSA standards (Hours worked in excess of 40 per week) qualifies for the deduction. More generous overtime required solely by state law, union agreements, or paid voluntarily by the employer is not eligible. Additionally, other forms of non-FLSA compensation, such as stand-by or on-call pay, are not eligible.

Special Exemptions

The FLSA exempts certain industries such as agricultural and seasonal recreational businesses from paying overtime. In addition, employees who meet certain criteria like executive, administrative, professional and outside sales employees are also exempt. Because of this, employees in these categories will not be able to take advantage of the qualified overtime exemption, even if their employer chooses to pay at overtime rates.

Support and assistance

If you need additional guidance on the calculation or reporting options for the qualified overtime, please let us know. We have templates and other resources we can share with you to assist you with this compliance.