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 βhalfβ portion of βtime-and-a-halfβ 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.
- 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
Employer Responsibilities:
- Employers are required to include the total amount of qualified overtime/comp time as a separate line item on the W-2. For the 2025 tax year, 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.