For tax years 2025 through 2028, individuals who receive qualified overtime compensation may deduct the pay that exceeds their regular rate of pay (generally, the “half” portion of “time-and-a-half” compensation) that is required by the Fair Labor Standards Act and reported on a Form W-2, Form 1099, or other specified statement furnished to the individual.
- Maximum annual deduction is $12,500 ($25,000 for joint filers).
- Deduction phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers).
The deduction is available for both itemizing and non-itemizing taxpayers.
This new above-the-line tax deduction for "qualified overtime compensation," is designed to reduce an employee's adjusted gross income.
What constitutes "qualified overtime"?
- The deduction applies only to overtime compensation that is "required" under Section 7 of the Fair Labor Standards Act (FLSA) of 1938.
- It is limited to the premium portion of overtime (e.g., the "half" in "time and a half"), specifically the amount in "excess" of the employee's "regular rate."
- The straight-time portion of overtime is not included in this deduction.
- Taxes still due: Overtime pay is still subject to Social Security and Medicare (FICA) taxes, as well as most state and local income taxes.
- Overtime premiums not "required" by the FLSA are excluded. This means:
- Registered Nurses, Nursing Services Director and Nurse Supervisors are not eligible
- Overtime required solely by state law is not eligible.
- Overtime paid pursuant solely to a contract (e.g., a collective bargaining agreement) is not eligible.
- This does include 1/3 of any comp time used and/or paid out
SPOC covered employees
- For 2026-2028, for any time in “excess” of hours worked over 86 hours in the pay period, only the half portion of time and a half will be reported on the W-2 in box 12 with code TT
Pay Slips
There will be a new section on the pay slips titled “Other Information,” which displays amounts eligible for the No Tax on Overtime. To assist with potential inquiries regarding these calculations, please refer to the following guidelines:
- Exempt Comp time (MEMO): This represents 1/3 of any comp time pay or payouts.
- Exempt OT .5(MEMO): This reflects only the 0.5 portion of overtime. Because overtime is calculated using the FLSA rate rather than a standard hourly rate, employees may not be able to calculate this figure easily.
- HRA’s can verify this amount by navigating to the Pay Result > FLSA tab and use the following formula: [FLSA rate] x 0.5 x [OT hours].
- HRA’s can also view this information by accessing the Additional Data tab within the pay results.
Employer Responsibilities:
- For calendar year 2025, the Act permits the reporting party to "approximate" the amount designated as qualified overtime compensation using a "reasonable method". Centralized payroll will be including this approximate amount in box 14 of the W-2.
- For calendar year 2026 qualified overtime will be reported separately on the W-2 in Box 12 with code TT