A new deduction included in the "One, Big, Beautiful Bill Act" that passed in July 2025 is the deduction for qualified overtime compensation. Effective for tax years 2025 through 2028, individuals who receive overtime compensation may deduct the overtime pay that exceeds their regular rate of pay. In other words, the "half" of "time-and-a-half." The overtime compensation must be required by the Fair Labor Standards Act (FLSA) and must be reported on a Form W-2, Form 1099, or other specified statement furnished to the individual.
Details of the new deduction include:
- Maximum annual deduction is $25,000 for joint filers or $12,500 for single filers.
- Deduction amount starts to be reduced when modified adjusted gross income exceeds $300,000 for joint filers or $150,000 for single filers.
- For years 2026 through 2028, employers must provide statements to the IRS and employees providing the amount of qualified overtime compensation.
- For 2025, employees may use pay stubs, timecards, or other records to determine qualified overtime compensation under transition rules provided by the government if their employer doesn't voluntarily report overtime compensation in Box 14 of Form W-2.
The deduction requires your Social Security Number on the income tax return and isn't available to individuals who file married filing separately.
Example: Taxpayer T is a non-exempt employee whose regular rate of pay is $20 per hour and for whom overtime compensation is required under FLSA §7. For week 1, T worked 10 hours of overtime. T's overtime rate is $30 ($20 x 1.5), but the premium portion is $10 per hour ($30 - $20). Accordingly, even though the total overtime pay T receives is $300 ($30 x 10 hours), only $100 of that is the premium or deductible portion ($10 x 10 hours) - the other $200 represents the (non-deductible) regular rate ($20 x 10 hours).
