02/11/2026
OVERTIME...
Legal Background
Section 225 allows a deduction for "qualified overtime compensation," which is defined as overtime pay required under section 7 of the Fair Labor Standards Act (FLSA) that exceeds the employee’s regular rate of pay. The deduction is limited to $12,500 per year ($25,000 for joint filers) and phases out for taxpayers with modified adjusted gross income (MAGI) over $150,000 ($300,000 for joint filers). The deduction is only available if the taxpayer (and spouse, if married) includes a valid Social Security Number on the return and files jointly if married. The deduction is available for tax years 2025 through 2028.
2025 Transition Relief and IRS Guidance
For tax year 2025, the IRS has provided transition relief because Forms W-2, 1099-NEC, and 1099-MISC will not be updated to separately report qualified overtime compensation. Employers are not required to provide a separate accounting of qualified overtime compensation for 2025, though some may voluntarily do so (e.g., in Box 14 of the W-2 or on a separate statement).
Acceptable Documentation and Methods
If the amount of qualified overtime compensation is not separately reported by the employer, the IRS allows taxpayers to use other documentation and reasonable methods to determine the deductible amount. The taxpayer may rely on:
Earnings or pay statements
Invoices
Payroll system reports
Other similar documentation that supports the calculation
The IRS has outlined several reasonable methods for determining the amount of qualified overtime compensation for 2025:
If a statement (such as a pay stub or payroll report) separately accounts for the FLSA Overtime Premium (the "half" portion of "time-and-a-half"), use that amount.
If a statement shows only the total overtime pay (including both the regular rate and the premium), use one-third of the total overtime amount.
If overtime is paid at a rate higher than 1.5 times the regular rate (e.g., double time), and the premium portion is separately stated, use an appropriate fraction (e.g., one-half if double time) of the premium portion.
If only the total overtime pay at the higher rate is shown (not the premium portion), use a smaller fraction (e.g., one-fourth if double time) of the total overtime amount.
If the above methods would underestimate the deduction (e.g., due to nondiscretionary bonuses increasing the regular rate), adjust the calculation accordingly.
If no statement is available, use a reasonable method based on the regular rate and the number of overtime hours worked (or reasonable approximations), possibly by requesting information from the employer.
For employees subject to special FLSA rules (e.g., law enforcement, fire protection, hospitals), use a reasonable method that reflects the applicable FLSA overtime rules.
Examples:
If a pay stub shows $15,000 as total overtime pay (including both regular and premium), the deductible amount is $5,000 ($15,000 ÷ 3).
If a pay stub shows $20,000 as total overtime paid at double time, the deductible amount is $5,000 ($20,000 ÷ 4).
If a payroll system shows $5,000 as the "overtime premium," the deductible amount is $5,000.
