Deduction for Qualified Overtime Compensation

The IRS has released new guidance regarding a significant tax deduction for qualified overtime compensation established by the One, Big, Beautiful Bill Act (OBBBA). This deduction is intended to provide relief to workers required to work beyond the standard 40-hour workweek.

What is "Qualified Overtime Compensation"?

For tax purposes, qualified overtime is defined as the pay required under section 7 of the Fair Labor Standards Act (FLSA) that exceeds an employee's regular rate of pay.

• The "Half" Rule: If you are paid "time and a half," only the "half" portion (the premium) is considered qualified overtime compensation.

• FLSA Limits: If an employer pays more than the FLSA requires (e.g., double time), only the portion required by law—typically the one-half premium for hours over 40—is eligible for the deduction.

• Ineligible Pay: Compensation is not "qualified" if the individual is ineligible for overtime under the FLSA, regardless of other contracts or collective bargaining agreements.

Eligibility and Limits

Eligibility is strictly tied to your status as an FLSA overtime-eligible employee.

Feature	Individual Filer	Joint Return
Maximum Deduction	Up to $12,500	Up to $25,000
MAGI Phase-out Threshold	$150,000	$300,000

Key Requirements

• Social Security Number: Taxpayers must have a valid SSN for employment and include it on their return.

• Filing Status: Married taxpayers must file a joint return to claim this deduction.

• Federal Employees: Eligibility is usually noted on Standard Form 50, Block 35. An "N" indicates you are nonexempt and likely eligible.

Reporting and Documentation

How do you claim this deduction depends on the tax year in question:

• Tax Year 2025: Employers are not required to report qualified overtime separately on W-2s. If your employer does not provide this information in Box 14 or a separate statement, you must calculate the amount yourself using Notice 2025-69 and Schedule 1-A instructions.

• Tax Year 2026 and Later: Separate reporting becomes mandatory. Forms W-2, 1099-NEC, and 1099-MISC will be updated to include specific fields for qualified overtime.

Note on Reliance: These FAQs provide general guidance and are not published in the Internal Revenue Bulletin, meaning they cannot be used to resolve legal cases. However, taxpayers acting in good faith based on these FAQs will not be subject to certain accuracy-related penalties.

Disclaimer

Investment advice offered through Stratos Wealth Advisors, LLC, a registered investment advisor. Stratos Wealth Advisors and Synergy Wealth Management are separate entities. 

Neither Stratos nor Synergy Wealth Management provides legal or tax advice. Please consult legal or tax professionals for specific information regarding your individual situation.